Protect Iron condors using the VIX

[tradermike79]

I don't see why you need to protect this position at all. The IC is in and of it's self a a tool for minimizing risk. You are taking on that risk of $1,000 and you need to be prepared to take that risk. If that risk is too high, I would scale back the size of your condor. In the event of this kind of drop, if it is sustained, it will be an acceptable lump on the head. If you like the risk reward for the condor, the two wings already serve that function.

If you were to attempt to hedge this position by using the vix, I would definitely stick to the front month vix as this this option is the most highly correlated to the spot vix price. Stay away from any type of calendar in the vix because each month essentially has it's own underlying with varying correlations to the spot vix (I learned this the hard way). I would perhaps to try finance an upside call with the sale of a downside put. The vix may 'rip' up, but I have never seen 'rip' down-- hence you can mange the put with some ease. Or, better yet, ratio your vix calls, sell the say, 30 calls, and buy 2 of the 35's.. something to that effect. that way, it cost you very little or nothing to hold the spread and, in the event of a huge drop, if the vix breaks 40 you should be sitting pretty long a lot of deltas.

 

[MTE]

Quote from seotrader:

45 strike price . the current price is 1.15$

I think its better hedge for quick movements, because it is much more sensitive to large quick drops.

So you can buy much cheaper insurance.

May VIX futures are not more sensitive to large quick drops! In fact not even the front month VIX futures are as sensitive as the VIX index.

So until you fully understand why we keep saying that hedging an IC with May VIX options is a bad idea you should stay away from VIX options!

 

[seotrader]

Quote from MTE:

May VIX futures are not more sensitive to large quick drops! In fact not even the front month VIX futures are as sensitive as the VIX index.

So until you fully understand why we keep saying that hedging an IC with May VIX options is a bad idea you should stay away from VIX options!

Hi dude

I got it -

use only the next month ( or current) options
And also the next month don't guarantee to copy exactly the vix, but it has better chance.

 

[stfreak]

protecting an IC with VIX option is quite a silly idea.
as it´s been said, VIX options are priced on the futures or "the expected" variance until expiration of the particular month.

buying deltas in the VIX protects the short vega part of the IC, but nothing else. and yes, short vega hurts your IC, but not as much as short gamma.

so what you hope is, that a large move in the UL is going to go hand in hand with a large move in the VIX, but what about a large move to the upside??

when you trade an IC, your bet is, that the realized volatility is smaller then implied volatility and the problem with volty bets is, that they are path dependent, that means, even if you are right on the stat_vol/IV bet, you could loose money.

so IMHO the only way to protect you from a black swan event is the classic market maker position:
short the body, hoard the wings and calendarize the whole thing in a way, that you are vega neutral, short gamma, long theta.

that means you could start with 100 IC´s in the frontmonth and hedge them with a certain number of straddles or strangles in the backmonth (lets say 20 or 30) so you are relatively neutral on vega. of course, you will have time risk, but when the shit really hits the fan, and the market moves 3sigmas against you, the backmonth straddles will kick in and it rains money.

if you are too small for this kind of position, you could buy extra OTM kickers on the downside either in the frontmonth or in the backmonth.
remember, you want to hedge a large move, not a market that is meandering to your short strikes slowly.
just check the vega profile of your IC and you will notice, that the position is long vega when the UL is closer to the long strike, then to the short strike.
thats where the kickers come in.
when you wake up with an UL blasting through your short strike at the open with a large gap, you will be very happy about the additional insurance.

 

[indahook]

Quote from MTE:

Yes, I am. It doesn't actually say in the contract specs, you really have to get into the way they work and how they are priced. VIX options are probably the most misunderstood product.

So, once again, VIX options are priced off of VIX futures not the spot VIX. I'm not going to go into the reasons as you can use the search button here on ET as well as Google and find the explanations.

By the way, VIX futures came about 2 years before VIX options.

Funny. I trade the VIX options rather well, they are one of my most profitable instruments. and I had NO idea they werent off the cash.

No need for the search function at all. Doesnt matter how they are priced as I`ll keep doing the same things.

Thanks and good trading to you.

EDIT for anybody that cares
------------------------------------

How is VIX calculated?
VIX is calculated directly from the price quotations of nearby and second nearby S&P 500 Index options spanning a wide range of strike prices. The VIX calculation is independent of any theoretical pricing model, using a formula that averages the weighted prices of at-the-money and out-of-the money puts and calls to derive expected volatility.

http://www.cboe.com/micro/vix/VIXoptionsFAQ.aspx#2

 

[akivak]

Quote from indahook:

Funny. I trade the VIX options rather well, they are one of my most profitable instruments. and I had NO idea they werent off the cash.

No need for the search function at all. Doesnt matter how they are priced as I`ll keep doing the same things.

Thanks and good trading to you.

Are you trading them as a hedge or standalone trades? Could you please share some ideas how you trade them? Front month? OOM? Spreads?

 

[indahook]

Quote from akivak:

Are you trading them as a hedge or standalone trades? Could you please share some ideas how you trade them? Front month? OOM? Spreads?

I am a simple man. Outright and front/next month directional bets only. But I would not suggest trading options purely directional unless you can trade all other issues that way successfully..very successfully I would add..