Ok, I'm short UVXY and I want to hedge against a black swan. Do I buy OTM calls on UVXY or on the VIX?
I don't know but sounds right either way (I think for margin purposes you want UVXY). I've been considering something similar. Following this thread for updates on your trade, let us know how it goes.
I suspect a straight up UVXY call per 100 shares short way out of the money is a smoother way of doing it than getting fancy and estimated VIX options needed. Might try a mix of both,
1. Bad idea to be short UVXY overnight. 2. If for some reason you feel you must, then consider setting an overnight order to short S&P mini or micro futures if the market falls to a level that starts to put your UVXY position at risk.
Sell deltas. You cant hedge a black swan. That would require that you give up all convergence/decay gains. There are ways to set up long convexity on the "cheap/free" and hedge the first few sigmas but you will need some type of edge built into the entry.
Just a partial hedge; not a perfect one, although an ATM call might give me something cloase, although the cost would be prohibitive.
Instead of dealing with options and all the various sources of piece movement associated to them, you can simply buy and long leverage VIX ETF of sell any short leverage VIX ETF. To compute your exposure you have: (number of shares) x (uvxy leverage 1.5) x (uvxy price) Where number of shares is negative if short. Now pick your favorite VIX ETF. You know price and leverage so solve for number of shares needed such that the sum of exposure is zero. That being said, I'm not sure the reason to do this.
What about the path dependency on the long. Over time, considering the long-term record, that would cost more than options, I suspect.
Most VIX products rebalance daily at the VIX futures settlement time. You would need to adjust the quantity to maintain the 0 exposure condition. Hard to determine the cost of this relative to options. As far as the quality of hedge, it is necessarily the closest hedge one can have for a short UVXY position.
Buy UVXY if you want to hedge a shart UVXY. Best advice you can possibly receive. Making a portfolio more complex when you actually intend to reduce risk is almost always an inferior choice. Unless you want to hedge against exposure to certain Greeks.