Hello, I have a series of SPX Short Puts that have a combined delta of 25, Vega of -800 and Theta of 210. Expirie range from 30 days to 100 days. I am concerned about sharp increases in Volatility. What is the best way to hedge this position? I don't mid getting short delta. Please provide specific answers. Thanks.
You can't cover the vega without closing the position or adding some kind of basis risk (skew or term structure)
Thanks for your quick response. Could you, please, be elaborate and provide specific details? I am ok with adding basis risk (skew or term structure).
Vega from different expirations are not really additive. So if you buy a longer term put hedge, you would be introducing skew or term structure risk. You could loose on both the long and the short position if the curve steepens.
There are some good books by Riccardo Rebonato and Alireza Javaheri that go into detail about volatility hedging and putting on skew and kurtosis trades.
You could hedge SPX vega with VIX futures (going long a particular month for instance), now the trick is to figure out the right number so you are as close to vega neutral as you want. In my case when I want to reduce vega exposure in my short gamma trades I usually go short a particular VIX spread in futures (usually 1 and 2).