Hedge XIV with VXX options?

S

scotta65

I am looking to buy this dip in XIV. I would probably buy 200 shares or so if i did. I am wanting some insurance in case XIV drops even drastically further, but unfortunately XIV does not have put options.

If I bought 2 call options on VXX while being long 200 shares of XIV, would that effectively limit my risk in a similar fashion as to buying 2 XIV puts?
 
No, it wouldn't.

There was an article on Seeking Alpha a dya or two ago about XIV. The sponsor warns in the prospectus that it's not meant as a buy and hold type investment. It's mainly for daytrading.

I realize that XIV has been a spectcular performer in this market, but as the article mentioned above spells out, that performance was the result of some unusual factors.
 
Quote from scotta65:

I am looking to buy this dip in XIV. I would probably buy 200 shares or so if i did. I am wanting some insurance in case XIV drops even drastically further, but unfortunately XIV does not have put options.

If I bought 2 call options on VXX while being long 200 shares of XIV, would that effectively limit my risk in a similar fashion as to buying 2 XIV puts?
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VXX calls are a notoriously terrible investment. Just look at the price history.
 
Quote from scotta65:

I am looking to buy this dip in XIV. I would probably buy 200 shares or so if i did. I am wanting some insurance in case XIV drops even drastically further, but unfortunately XIV does not have put options.

If I bought 2 call options on VXX while being long 200 shares of XIV, would that effectively limit my risk in a similar fashion as to buying 2 XIV puts?
More...

You can "collar" it: buy two VXX calls, slightly OTM, and sell two VXX put spreads, also slightly OTM. Limits theta, gives you a quick boost if things go against you.
Note that VXX is worth more per unit than XIV right now, so doing what I just outlined will severely limit your upside. It will help you considerably in case you're wrong of course, but you pay a large price for that. You can probably figure something decent out playing with the strikes, expirations, and the number to buy/sell. It all depends on how much risk you want to take.
 
So what happens to the VXX calls in that scenario? Isn't it likely they suffer a vol crush? I realize the OP isn't looking to be delta neutral, he just wants "protection", but there are so many moving parts here, it strikes me as very complex. No doubt plenty of people have worked it all out, and I would be curious in the result, because the trade itself is interesting. VIX has a high tendency to auto regress, so buying XIV when VIX spikes is an obvious approach.

The exercise is useful for another reason. These exotic ETFs and ETNs carry hidden risks. There is a lot going on with them beneath the surface.
 
Quote from scotta65:

If I bought 2 call options on VXX while being long 200 shares of XIV, would that effectively limit my risk in a similar fashion as to buying 2 XIV puts?
More...

Funny way to limit risk. Think in nominal amount not in number of shares.
Long 200 shares of xiv means short 200 x 21.28 / 20.42 i.e 208 shares of VXX. Then you add 2 VXX calls.

So, to sum up you just want to buy 2 VXX puts.

PS:
21.28 is XIV Apr 19 Close price
20.42 is VXX Apr 19 Close price
 
VXX and XIV are not directly inversely correlated, I can't remember why but VXX apparently drops more % than XIV rises on equal rise in VIX. Also VXX calls, which is what I assume you'd buy, are terrible investments. You're probably better off just buying less of XIV to begin with instead of messing with VXX.
 
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