VIX Calender Spreads as a hedge

Discussion in 'Options' started by jthomp5454, Oct 19, 2011.

  1. Hey guys,

    I have been looking into using some net cost:$0 short front month, long second month VIX Calender Put Spreads to use a hedge on some of my trading(note: I will sell the entire spread a few days before the 1st month expires). The only problem with this trade is the capital intensive margin requirements make it unpractical. I feel I understand all aspects of the trade, as well as all the differences between vix options and normal options and I analyzed past trades to see how it would perform. So why are TOS margin requirements so high on this trade? Could I get a better margin requirement somewhere else, or would I have to find a prop shop that allows me to trade options to get this hedge to work?

  2. Calendar spreads and VIX are a risky combination. It can seem to work fine at first but if there is a great change in volatility it's very frustrating to see the front month losing money while the back month barly making up for it. It happened to me.

    BTW when I used this spread, before TDA was fully in-charge of TOS, I didn't have any issues with margin requiments , I believe it was identical to any other calendar spread. If TDA changed it I can only say it must be one of the only rational things they have done.
  3. sle


    do you put them on as an SPX-neutral ratio or 1:1? ratio vix spreads or flys is a great carry strategy, once you worked out the kinks.
  4. Traded a classic calendar. e.g sell 10 call 35 front month (the closest to expire), buy 10 call 35 back month. If volitality rises this type of spread is going to get hammered cause the back will hardly move compared to the front, unlike standard options would.
    Will very much appreciate an example to a VIX trade that would involve less risk.

    Edit: I was neutral on SPY at the time
  5. sle


    Oh, I thought you are talking about a futures calendars, but the thought process is very similar.

    No, you were not. If you are short say first VIX futures and long the second one, you are not neutral with respect to SPX. Think of it this way - what is VIX? VIX is a forward variance contract (well, almost) and thus it has a huge exposure to S&P skew. Thus, if you have this spread in equal number of contracts, you are going to be actually long S&P. You can easily prove it to yourself either by taking the time to do forward vix replication from vanilla options or by simply regressing each of the futures with respect to the SPX returns.

    Actually, in this kind of spread you have a whole set of exposures bunched together.

    For starters, you have a huge amount of spot exposure because you are not neutralising yourself against he movement of the SPX spot along the skew in front and back month VIX. You can either trade some S&P futures to protect yourself or you could trade the spread as a ratio where you are going to be skew-neutral (it's going to be some place around root-time ratio, e.g. 1m vs 3m would have a ratio of 1 : sqrt(3)).

    Second of all, even fixed strike vol (assuming that you have somehow immunised yourself against the movement along the skew) moves in root-time manner.

    Third of all, your calendar is a combination of views on vol of vol and views of the shape of the term structure.

    I am happy to share my ideas on how to look at VIX fuutres/options but if you don't mind, I'd rather move this discussion to PM. Don't want to sound like a shill and/or attract somple people from the thread "who actually makes money in options".
  6. Bear in mind that as opposed to calendar spreads on physically-settled options (such as SPY) in calendar spreads on cash-settled options (such as VIX) the max loss can be greater than the debit paid for the spread, and this may be one of the reasons for the higher margin requirements.

    See also the following discussion: