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Buying VIX Calls


bginburg
Posts: 13
Topic starter
(@bginburg)
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Joined: 4 months ago

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?

8 Replies
figuy1
Posts: 40
(@figuy1)
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Joined: 9 months ago

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.

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earlyretirementnow.com
Posts: 231
(@earlyretirementnowcom)
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Joined: 6 years ago

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?

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4 Replies
bginburg
(@bginburg)
Joined: 4 months ago

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Posts: 13

@earlyretirementnowcom That is what I've struggled with too.  Part of me just says forget trying to scale correctly and spend a week's worth of premiums to help blunt the impact while volatility is low.  Worst case is it costs me a week worth of premiums, and if volatility does spike, I am at least in a better position than I'd be if I didn't buy the VIX call, even if it didn't entirely offset my losses.

I also do a mix of MES and ES contracts given my portfolio value and target leverage so makes it even less clean of a 1 Short SPX Put : 1 Long VIX Call

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charlie02
(@charlie02)
Joined: 8 months ago

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Posts: 9

@earlyretirementnowcom I've researched a bit into this and apparently you buy 1 /vx futures per 2 naked spx and let it run to expiration. Haven't done it myself because it eats too much into profit.

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

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Posts: 231

@charlie02 Thanks for the suggestions.

Same here. Should have done it when the VIX dropped so low last week. 🙂

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charlie02
(@charlie02)
Joined: 8 months ago

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Posts: 9

@earlyretirementnowcom Yes.

 

Were you okay yesterday? I had sold a handful of 4300/4200 put spreads. I chickened out when it tanked to 4315 and paid a few thousand to close the short legs. Who knew that SPX would rise up so much in the last 45 minutes 🙁

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perig
Posts: 6
(@perig)
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Joined: 9 months ago

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.

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1 Reply
earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

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Posts: 231

@perig That sounds like a great plan! Thanks for sharing!

I've never seen a good tool for an ex-ante analysis like that. Though, IB has a tool for VAR analysis of the current positions. So, after-the-fact I could use that one.

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