New to Options.... VIX/hedging help

[upandcomer]

Hey everyone,

I’m quite the lurker, but was hoping some of you could help me out with this. Within this past month I have decided to open my first options account. I made the decision to do so in order to utilize the leverage and hedging abilities options provide. My question is regarding VIX calls. I’m having trouble deciding how many months out the expiration should be for hedging purposes. What troubles me is the huge time premium do to the underlying volatility, and my lack of knowledge with the time erosion curve on these securities. I'd greatly appreciate any advice/pointers/links to good articles on this.

FYI- I am currently holding May $20 dollar calls to hedge a basket of mostly long calls, with expected trade durations of about 1-4 months.

Thanks for the help.

 

[nazzdack]

Quote from upandcomer:
----VIX calls.
---- I’m having trouble....
----how many months out....
----What troubles me....
----huge time premium due to the underlying volatility....
----my lack of knowledge....
----time erosion curve....

1) The VIX has additional quirks beyond those of its underlying instrument.
2) Instead of VIX call options, you may want to trade index put options.
3) Spring and Summer tend to be "calm" in the market. The Fall can be a better time to get bearish on the market.
4) If you're going to buy call options, buy at least 3 or 4 months of time in order to avoid steeper time decay.
5) The fact that you admit having "trouble" with your position will become real trouble later on.

 

[Epic]

Yes, using VIX options as a hedge adds another layer of variables onto the ability of the hedge to adequately do it's job. Sort of like buying NDX puts as a hedge against a long ES position. First, NDX and ES are not 100% correlated, and secondly adding all the option variables into the mix.

So it is with VIX. It is not 100% correlated even to SPX. So it isn't a great hedge to begin with. Then using the derivatives of an imperfect hedge just makes it less accurate in the long run. Simply using SPX options is better.