In finance, there is no such thing as a free lunch. Every trade or investment carries some risk to justify its returns. Even safe-haven cash isn’t risk-free – inflation could eat away the low rates you’re receiving for that safety. But if there’s one thing that has been close to a free lunch in investing it has to be shorting volatility.
The measure of the market’s “wonkiness” has been dropping like a stone since the end of the Great Recession. And that’s made for easy pickings for traders looking to cash in. In fact, shorting volatility has been one of the best trades since the Recession, surpassing the returns of every asset class on the block.
However, if history is our guide, this easy street that the markets have been driving on can’t, and won’t, last. For investors still hanging on to the big gains from this trade, the heartbreak could be severe.
Learn about the different metrics used to measure and manage risk here.