#Volatility: power and peril

Volatility has been the market buzz word for several years now. It has almost become an asset class on its own. But just like any other new (or old) asset class, volatility investment products come with both great profit opportunities and potentially dangerous risks.

There are many volatility products in the market now. They generate excellent trading space for savvy investors to capitalize on this irrational behavior, as well as to hedge risks in other markets. The most famous volatility product is probably VIX, which is based on the short-term volatility of options available on the S&P 500 index. And there are certainly many people jumping into the volatility-trading pool already.

But investors need to be reminded that volatility, by nature, is for trading rather than investing; it has a zero or even negative long-term expectation. Also these are after all high risk, esoteric products that require investors to really do their homework and understand what they’re getting before diving in. The plunge in the TVIX volatility-linked exchange-traded product, which lost half of its value in two days, is a good example and reminder of the embedded risks in volatility products.

As sophisticated professionals, quant traders and managers are certainly up for the challenge to take advantage of volatility-generated opportunities. They also help investors battle it and develop low-volatility strategies. At the Trading Show Chicago 2012 event, experts such as Yin Luo from Deutsche Bank, Arun Kaul from Olympian Capital Management, and Dominic Salvino from Group One Trading will generously share their expertise of profiting from market volatility.