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Buying VIX Calls
What are thoughts on buying longer term VIX Calls? Dec/Jan Calls with 20-25 Strikes could be bought for around a week to two week premiums and figure between now and January, that should spike and provide some hedge to the losses.
Has anyone employed this strategy successfully when VIX has been low?
Nice thought, I've also thought about buying 3+ month SPX low delta puts for a more direct hedge when Vix <15 but haven't actually tried it.
I like that idea as a hedge against extreme vol spikes. One question I'm struggling with: what's the "correct" scaling? One long VIX Call per short put option? If we have a vol spike and the VIX goes to 30 and the VIX Jan call with a strike of 25 jumps from 4.00 to 20.00 (i.e., time value jumps to 15), then the gain of 16 in the long Call might not be enough to compensate for the loss in the short put (20+, 50+?)
But generally, I like the idea. Seems to be cheap insurance!
Has anyone tried this in practice?
I've been using VIX calls spreads as a hedge for a while. I buy the 25 or 30 VIX when it gets ~16 VIX. I offset some of the cost by selling the 50 or 60 VIX. That gives about 25-30 pts of hedge. This edge is for major corrections only. I won't sell until VIX reaches closer to the short leg.
Now it won't cover a full loss if a major correction happens but it can soften the blow a bit. If I can reduce my losses by 30-50% then I will live another day.
One way I've found is not scientific but is pretty easy to find out how much hedge I need is to input my open positions into Thinkorswim, go to the analyze tab and find out how much I would loose if market was to tank 15%. I then add the VIX Calls spreads and play with the volatility to check what the losses would end up being.