PT - JOURNAL ARTICLE AU - Wei Ge TI - A Survey of Three Derivative-Based Methods to Harvest the Volatility Premium in Equity Markets AID - 10.3905/joi.2016.25.3.048 DP - 2016 Aug 31 TA - The Journal of Investing PG - 48--58 VI - 25 IP - 3 4099 - https://pm-research.com/content/25/3/48.short 4100 - https://pm-research.com/content/25/3/48.full AB - The volatility risk premium (VRP), also known as the insurance risk premium (IRP), is an attractive source of extra returns that has low correlations with equities and fixed-income assets, and thus it can provide diversification benefits on top of traditional portfolio holdings. This article examines and compares the three most commonly used derivative-based methods to monetize the VRP: equity index option strategies, variance swaps, and CBOE Volatility Index (VIX) future constructs. The study analyzes both qualitatively and quantitatively the strengths and weaknesses of the three approaches, as well as their historical returns and risk profiles. More importantly, the potential for added diversification by all three approaches is discussed from an investor’s perspective. The study concludes that option strategies or VIX future constructs are more preferable than variance swaps for many investors.TOPICS: Analysis of individual factors/risk premia, derivatives