portfolio hedging using VIX calls

[klotzki]

Has anyone tried implementing a portfolio beta neutral hedge using long VIX calls overlay? I'm looking into this now and I'm not sure if my calculation / method is right since it would mean my portfolio being 15% invested in just the VIX call contracts alone.

I want to hedge a long/short equity portfolio against sharp market declines just for the next few days. The portfolio currently is 40% cash/60% US equities and coincidentally has a portfolio beta of 1.0.

Per historical averages, biased to the recent months, I'm assuming VIX jumping by 10% if ever another 3% drop happens similar to last week. So say for a $1M portfolio, hedging the potential $30k decline using VIX Oct'10 27.5 calls (current ask $6.10, delta 0.50+) would mean buying about 230 contracts worth $140k??? (Given VIX spot now is 26, +10% increase = 2.60, corresponding to 1.30 increasing the Oct calls, and $30k/1.3/100 = 230 contracts).

Not sure if this is right, nor if this is the most efficient hedging strategy.

 

[option911]

Its actually something I have been doing math on and analyzing. I think it truely depends on the steepeness of OTM put skew whether the VIX futures/options make more sense than using options on something like the SPX for instance.

 

[GammaJammer]

I think you also need to be fully congniscant of the structure of the Vix. I am by no means an expert but I do seem to remember stumbling across a paper a while back (couple of years maybe) talking about this very subject. Something to do with short ETFs and long ETFs - jist of it was that there's stuff affecting the Vix nowadays that doesn't behave as you'd expect. I know I'm being really fuzzy - sorry. If I find the piece / link again I'll post it. Just something I stumbled across totally at random one day.

GJ

 

[option911]

couldnt agree more