Hedging short puts with VIX?

Discussion in 'Options' started by matador04, Jul 3, 2008.

  1. It's not the perfect hedge by any means, but how effective do you think it would be? May be cheaper than delta hedging...
  2. TYtrader


  3. dmo


    Using VIX futures to hedge the delta risk of your short puts? I think you're comparing apples and oranges.

    Let's think this through. If you sell puts, you face 3 categories of risk - delta risk, gamma risk, and vega risk.

    If you buy VIX futures at the right ratio, you are somewhat vega-hedged. That is, you are hedged against a rise in implied volatility.

    But I don't see how that hedges you against delta risk. For that, you'd have to sell the underlying.

    If you've effectively hedged your vegas and deltas, you now have only gamma risk.

    This is a fun theoretical exercise and all, but I doubt there's the germ of a profitable trading strategy here. Whatever your expected market scenario, I suspect there are more efficient ways to play it. For one thing, the VIX futures are a very imperfect hedge for short vegas because when the VIX index really spikes up, the futures lag far behind.
  4. Delta hedging is way more important than vega.

    Use a Black-Scholes calculator and see for yourself that delta affects prices much more than vega.
  5. Thanks for the insight. I see what you mean about the VX futures lagging; they use forward implied vol.