Short Volatility, Relative Carry, and Normalized Momentum Rules
Summary
The document discusses several systematic trading ideas. It frames short volatility as harvesting the gap between option-implied and expected realized volatility, using short volatility futures with a constant negative forecast and volatility-based position scaling. The strategy can earn steady returns but carries severe drawdown and negative-skew risk, so the author presents it as a complement to trend following and warns against combining it carelessly with equity exposure.
It also outlines relative carry: smooth carry estimates, then compare each instrument with the median for its asset class to favor higher carry and short lower carry. Finally, it describes normalized momentum, which scales returns by volatility, caps extreme observations, accumulates them into a normalized price series, and applies a trend filter. A related aggregate method takes the median normalized return across instruments in an asset class before filtering. The text offers qualitative comparisons and one reported skew estimate, but several referenced performance charts and test details are absent, limiting independent assessment.
Key ideas
- Short volatility futures can harvest a volatility premium but expose a portfolio to sharp losses and negative skew.
- The author recommends volatility scaling and cautions against treating short volatility as ordinary equity diversification.
- Relative carry compares smoothed instrument carry with the median carry within the same asset class.
- Normalized momentum scales returns by volatility before accumulating them and applying a trend filter.
- Asset-class momentum can be estimated by aggregating normalized returns across that class’s instruments.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.