I am trying to understand this from a more theoretical possibility. It is clear that a trader cannot hold onto volatility without the position decaying in value. This would mean that there would be an constant unexploited inefficiency in the market. Is there a brainier explanation that delves a bit into the how and why?
It has to do with the fact that volatility is non-linear (sd = sqrt(variance)) and because of that fact a pure vol position (a vol swap) requires dynamic replication. Now on the other hand one could get into a variance swap, because those can be priced with static replication.
the only constant unexploited inefficiency are the legions of idiot traders that do stupid stuff. swy buyers up to 32 comes to mind.
You can buy a VIX based ETF but it will constantly go down. It's called "Theta". Volatility as measured via VIX (or implied options volatility) is measured accross multiple expiries and strikes, and the theoretical value of the VIX can move for free from one expiry to the next because it is a theoretical value (no transaction costs). On the other hand, VIX ETFs have to deal with options or swaps or similar stuff depending on the product, and those always decay in value due to theta (relative to underlying price). In other words, you can't be always long volatility because as future approaches the present,it becomes more certain. You can keep buying OTM puts though, and hope that one day a volatility explosion will pay off all the $ that theta took...
it's not due to 'theta' or the fact that vol exposure requires dynamic replication. it just stems from the upward sloping shape of the vol term structure which suggests vol of vol is structurally overpriced (in other words, long-run decay in vix etfs is not a theoretical requirement)
One problem during volatile market condition is that we will not be able to open the trade at all because of the trade context being busy, better to place pending orders so that we can hold and also manage the trades as prior to execution we would have set the TP and SL.
I guess it's like the carrying charges of holding commodity futures when there is no strong near term demand or supply restriction. Simply holding distant contracts in those instances would lose money when the future prices drop to the current cash price. I imagine is somewhat similar to volatility except that traders naturally expect there will be more volatility in the future the same way interest rates at the long end are higher than the short end due to duration risk.