Hedging: Cheap VIX Calls or DOTM SPX Puts?

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Woodrow97

Hey guys,

With the US equity markets looking all nice and sunny, I'm looking to buy hedges for my short gamma positions (NTM naked puts, 45 DTE) on individual stocks and indices. The plan is to continuously buy trash options that are worth dimes on the VIX or SPX, let them expire, and roll them out to the next period. I don't expect to make any money on these hedges, but instead have their time value blow up spectacularly if a large unexpected drawdown happens, and offset any temporary M2M losses on my short premiums to prevent a potential margin call.

Would a VIX or SPX hedge better achieve this purpose? What are your thoughts?

Thanks in advance!
 
Woodrow97 said:
Hey guys,

Would a VIX or SPX hedge better achieve this purpose? What are your thoughts?

Thanks in advance!
More...

How about diversify the hedge - 30% VIX and 70% SPX. You might also consider NQ Options on futures as an NDX correction should be a larger percentage drop than the SPX correction.

I think you have a better chance of the hedge hitting the penny SPX/NDXs if a snap correction occurs. But the returns on the penny VIX calls could be massive if a large enough snap correction occurs over a Thursday, Friday, and the following Monday for the Tuesday morning CBOE VRO settlement price.
 
MidwesternTrader said:
How about diversify the hedge - 30% VIX and 70% SPX.
More...

Hmm, yea, this is in line with what I'm thinking too. There's still quite of a bit risk premia left on VIX calls since Feb and it's probably better to position more on the cheap SPXs. Get these puts at the start of the week and buy VIX calls near the end. Also, very interesting that you mentioned NDX options, didn't think of that, good call!

Thanks a lot for your input, MidwesternTrader. Much appreciated.
 
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