I currently am trading on the vol, for the general strategy you need to know this: ETFs/ETN don't exactly track the underlying on an intraday basis but are re balanced as close to the end of day as possible so the end day return on assets is equal to that of the underlying. This is especially true of levered ETFs. More vol = more price distortion = more arbitrage opportunity if you time your long/short right before re balance. While not exactly arbitrage it is just about as close as you can get

Ethan do you have a PoC you would care to share on this? Would be interested to see.

PoC?

Proof of Concept -- like an example

Thanks for the reply Ethan , so from a prcatical point how do you do that within Quantopian algorithm? and what parameters do you use ?

So for example look at DGAZ/UGAZ they are 3x nat gas ETNs, back in early 2014 when the polar vortex depleted storage levels we began to see price spikes in the spot markets resulting in HUGE vol in the fwd curve as no one knew if producers would be able to inject a sufficient amount of gas in the summer months to prepare for the coming winter. So what I would look at for the underlying is the Henry Hub Nat Gas spot price as most other locations in the US are priced on a basis differential to HH so the you are excluding local supply demand shortages for the most part. On an intraday perspective these prices could have been extremely to not at all volatile, you would like to wait for a volitile day where the ETN diverges somewhat from the HH nat gas spot. Say HH nat gas is down 1% but DGAZ is only up 2.5%(DGAZ is an inverse ETN). Based on the underlying return, -1%, DGAZ should be at 3% return for the day. Theoretically if you buy at this point right before the rebal then the ETN will rebalance it's leverage assets to achieve a 3% return to match the underlying return for the day times -3%. Close the position as close as possible to market close to capture the .5% jump.

From a code development perspective you want to detect when there is a divergence between the underlying and the derivative to open a position, then close it upon correction. As for the parameters that is up to you to figure out.