Trading volatility is like trading most other assets, except that volatility can't be traded explicitly. Volatility is traded implicitly using, for example, options, futures, and the VIX index. Because volatility is an intrinsic value of the assets, it can't be traded directly. To be able to trade volatility, either a hedge position using a derivative and its underlying asset or an option position is initiated.
One often divides volatility trading into two categories: directional trading and relative value. Directional trading in volatility means we trade in the direction of the volatility. If the volatility is high, we may initiate a short trade in volatility. Relative value means we initiate two trades, where, for example, we go long in a call and short in another call. The first call may be under-valued in terms of volatility and the other may be slightly over-priced. The two related assets are then supposed to mean revert, and the profit is to be monetized.
In this...