I got a question here, recently I've been checking some data and according to it holding short-term VIX calls was statistically more effective than holding SPX puts even with rolldown and contango costs. I do believe they tested 1 month calls but it's also true for 2 month calls. But what about 3-6 month(and even further) VIX calls? While it's obvious they won't react so sharply to imminent SPX drops, it's also obvious they shouldn't stay flat. The question is - for given time periods(3-6 months) would they be "flatter" than SPX puts or not? Note, I am talking about buying VIX calls when VIX is relatively low and roll only when it's at same or lower price than initial purchase, otherwise just sell when rapid contango hits in to avoid bigger losess. Additionally, I know that longer dated VIX calls will also have much lower liquidity and because of this getting actual returns will be much harder, ie. possibly selling calls below brokers "bid" prices.
Your question cannot be answered without specific context and strategy. Either of them can be "more effective" in thousands of different situations. Sometimes SPX puts will be stronger, other times VIX calls, and each one may protect different types of portfolio. Main issue with VIX is that short-term VIX calls can skyrocket while long-term VIX calls may not do much due to backwardation and VIX options corresponding to different VIX futures. That's why VIX calendars are the most dangerous strategy that blew up both traders and brokers. Generally with VIX calls you need to be accurate in terms of the date when VIX will spike, while with SPX puts you don't need to be accurate. But that's only a part of their differences. Even when you trade only VIX calls or only SPX puts, you'd still use different strategies in different vol regimes, so comparing them today will be different than comparing them a month from now. All this also applies differently to hedging various other options expiring on different dates. Basically only you can answer such questions, based on how they apply to you.
VIX is variance and bounded to 11-12 on futures. Different animals but VIX is absolutely a better hedge with SPX vols in the bottom two deciles.
Based on my backtests, adding some VIX exposure has produced better risk-adjusted and absolute returns than adding puts. However, VIX exposure wouldn't save you during a bear market that lasts for years, like the dot com bubble collapse or Great Depression. Puts would be better in this case. In short, long VIX has been better than puts since the dot com bubble, but that is only because corrections have followed a similar pattern (sharp crash, quick recovery). If you think we are headed toward a sustained bear market, then puts are the way to go. As always, the answer largely comes down to your thesis about the market. Your P/L is simply a reflection of the accuracy of your thesis. You can experiment with VIXM to give you an idea of how longer term VIX calls would perform: https://www.portfoliovisualizer.com/backtest-portfolio
In my personal experience with vix calls during the financial crisis, the spread on the calls were extremely wide......very difficult to close the position. My guess is high volume spy puts would be easier to close.
Yeah, I get it. In fact in one of papers I've read they have actually put a whole chart with effectiveness of VIX calls against SPX puts and it was evident that sometimes one was better than other and sometimes it was the other. But in the end the conclusion was, that VIX calls were more profitable(during that backtested period of time). But as I said, they tested only 1-2month VIX calls which were obviously capable of higher spikes than SPX puts. But I was only wondering would spikes in 3-6month VIX calls(based on appropriate futures) be better or worse than price of SPX puts in given periods of time. For example lets assume I would buy three ATM VIX calls today with expiration dates: September, November, January and three ATM SPX puts. Then lets assume that we would have thee exactly same volatility spikes in August, November, December based off 5% SPX decline(SPX drops by 5% one day but then recovers fully, all in one month). I am trying to find out would those long-term VIX calls be better than SPX puts in such situation. So if SPX would drop by August by 5% then today's ATM SPX put would fully cover the loss(minus option price). But what about Sept/Nov/Jan ATM VIX calls, would any of those be able to cover 5% August drop? While it's obvious that short-term VIX calls should be able to cover it I am still wondering on long-term VIX calls.
My point about VIX calendars addresses this question somewhat. So many people lost money on VIX calendars, some blowing up their accounts, and almost blowing up brokerages that didn’t know how to estimate the risk on those - that the only logical conclusion is that long-term VIX calls cannot have much hedging power when compared to shorter-term. Basically if you were selling shorter term VIX calls and buying the same number of longer-term VIX calls then you’d be losing money to the point of blowing up during a crash. So by default those longer-term VIX calls can’t be more effective. But they may be more effective for hedging the specific month they’re targeting. Any specific way of utilizing longer-term VIX calls would need to be tested empirically. It’s opposite with SPX puts though. You could sell short-term SPX puts and buy longer-term ones, and maybe you’d be losing when nothing happens, but at least you wouldn’t blow up during a crash. (I’m using calendars just an example to determine which ones may be more effective, not as a hedging strategy)
VXX otm calls will have much higher ROI if SPY takes a huge dump. Example in SEPT where it dropped 30 points in less than 4 weeks. That's the only DD comparison I did. I am sure in a lot of other situations SPY puts will be more profitable. They also had a 1:4 reverse split recently so it may no longer be true or to a lesser extent.