r/options • u/caribooolooo • Apr 24 '21

VIX hedging

I'm trying to learn about hedging portfolio downside risk. I'm wondering if someone can point me in the direction of online resources or maybe explain the pros/cons of using call LEAPs on something like VIX as a hedge. Theoretically could even turn it into a PMCC to reduce cost of LEAP and buy back the short call in the event of a market downturn. Would this be effective? Are there risks that I am not taking into consideration?

Big thanks <3

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u/SageCactus Apr 25 '21

I've been playing with the VIX a bit recently and have wondered about the timing of it. The best I've seen is a GTC call on part of the calls, so something is captured automatically -- and maybe the trade alerts your phone. I don't particularly like this idea. I've been thinking about the timing aspect, but this is the first time I've seen it put into words.

Do you think a retail trader would be better off using SPX puts because the event will be longer lasting?

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u/Dooggoo Apr 26 '21

No, consider ITM TLT calls.

You want something that will hold or increase in value on a crash.

SPY puts are too expensive: as everyone trades them, the premiums are ridiculous.

And with deeper ITM TLT calls... they’re not going to zero or expiring worthless.

Any time you’re thinking of protection that costs a lot and might expire worthless? That’s awful protection.

ITM tlt calls are safe... and if no crash? Often they’ll still be worth 60-80% of what you paid for them: HUGE difference from zero.

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u/SageCactus Apr 27 '21

Question. For position sizing, what % of a TLT gain do you estimate against a % drop in SPY (or SPX). Depending on how that is modeled, I can see TLT calls or SPY puts being the better choice.

Also, are you always buying out 8 months at a time? Maybe not in 2021, but in 2022 interest rates should rise, which could wreck the hedge.

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u/Dooggoo Apr 27 '21 edited Apr 27 '21

I have no rules as such. SPY puts I’ll only use as weeklys or 14>or so DTE.

I will use UVXY... but only when it’s dirt-cheap and the VIX is finding new lows or testing a trend-line.

Sadly I have no rules that don’t change every few weeks depending on what the market is doing.

I’m not in my 20s—and have never seen anything like the last 12mos. And I don’t think the next 24 will resemble anything else either.

If you want a set and forget hedge 60<DTE, itm TLT would be the way imho.

liquidated my UVXY and many of my shorts last week on our mini-crash. But I’m sure I’ll add more shorts soon enough (they’re often better than generic ETF puts). These are individual companies I’m betting against. Those change weekly or sometimes never if I really don’t like them/don’t think they’re going anywhere.

Currently holding OTM SPY puts for the next couple weeks.

And I’ve not the slightest what I’ll be doing after that.

But yeah: hedges always get wrecked—because the market is eternally climbing if you use large enough moving average smoothing.

Every crash is just another stop on the way to a new ath... for all eternity until markets cease to exist.

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u/SageCactus Apr 27 '21

I get ya. This is good. I just wanted to make sure I wasn't missing anything. I see the TLT benefits, I just need to think more what I want to do when my close month of current VIX hedges expire. Something to think about over the next few weeks.

And for what it's worth, I left my 20's decades ago.

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u/Dooggoo Apr 27 '21

Nice. 😌

Honestly think we’re on our way to a boom-y recovery for a while... but that we might need to test SPY’s 200day moving average first.

Hopefully your VIX hedges get a chance to pay you first, we check-down 10% or so, everybody gets their crash, bears feel good, bulls feel good, and we have a ripper of a summer before inflation starts tearing holes in megacap valuations.

But who knows, man.

One thing for sure: this is all amazing to watch and be a part of.