SPX credit spread analyze

Discussion in 'Options' started by LCFXTRADER, Apr 29, 2011.

  1. Could you guys please explain the max risk with this options trade with the hedge of VXX? I have heard that the VXX is negatively correlated to the SPX. Thanks for your comments.

    Activity Date Transaction Description Symbol Qty Fill Pr
    4/26/2011 Buy To Open VXX May 11 24.00 Call VXX 6 1.2 -720.9
    4/26/2011 Buy To Open VXX May 11 24.00 Call VXX 4 1.2 -480.6
    4/26/2011 Buy To Open VXX May 11 24.00 Call VXX 1 1.2 -120.15
    4/26/2011 Buy To Open VXX May 11 24.00 Call VXX 19 1.2 -2291.35
    4/26/2011 Buy To Open SPX May 11 1330.00 Put SPX 30 12.4 -37204.5
    4/26/2011 Sell To Open SPX May 11 1340.00 Put SPX -30 14.4 43183
  2. With SPX at 1356 it could easily bleed down below 1320 without VIX ever even breaking 20 let alone 24 so your hedge could have no effect whatsoever. Also, all of that for a net potential profit of less than $3k. You would be better off just buying long puts for a directional bet than wasting all these commissions.

    VXX is not perfectly negatively correlated with SPX so it is a very imperfect hedge.
  3. Volatility is not a measure of the price of the target but a measure of how erratically it might get somewhere. To suggest that it is negatively correlated to its target is an assessment of what has sometimes happened, not a direct connection. To understand the effectiveness of your hedging strategy you must be able to assess with what probability your observation happens.
  4. I tend to agree that the VXX hedge would not have much of an effect here. If the SPX declined to 1330-1340 levels in the next few weeks, I don't think it is a staggering enough drop to make volatility explode. I recently posted about a similar strategy, here:


    but my analysis and back testing was more geared towards a black swan event as opposed to a big dip.
  5. Sounds more like insurance than a hedge, although it is sometimes hard to tell the difference. :)
  6. Well here we are less than a week later and SPX has closed at 1335 from a recent high of 1370 :) .

    VIX is at 18.20
    VXX is at 25.35

    Clearly you need a bigger move than the OP's suggestion to make this insurance/hedge a viable strategy.