Hedging a relative value options position

Discussion in 'Options' started by TheBigShort, Dec 20, 2018.

  1. TheBigShort

    TheBigShort

    As of Tuesday, I shorted 4 SPY Jan 18 straddles @ 22.5% IV and purchased 24 VGK straddles @ 19.2% (theta weighted the position).

    At the time my relative future realized volatility forecast was:
    SPY = 22.5%
    VGK = 24.1%
    or
    SPY = 17.8%
    VGK = 19.2%

    How should I delta hedge the position? For the last 2 days I have been hedging at the market IV, but today I am realizing, that even though the realized vols are highly correlated, the implied vols can get somewhat off track.

    For example, SPY IV spiked (causing me to hedge less frequently) and VGK remained stable (not increasing my hedging frequency). My mark-market loss is getting a little out of line for a relative value play (due to vega losses and some gamma losses). Any advice would be great!!
     
  2. newwurldmn

    newwurldmn

    Does it matter? How different would your pnl be if you hedged on a reasonable static vol?