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My particular options positions are typically a long delta, and long vega. Decreases in implied volatility, or specifically the VIX, can drastically alter the profitability of my position.

Is there a way to hedge this?

My possibilities seem to be:

  • An additional calendar spread on the two front most series of the asset that I want to have my core long delta and long vega position in.

  • Being short the VIX in some capacity such as puts on VXX ETF, shorting VXX ETF, long inverse VIX ETF (SVXY), long equity+options position on inverse VIX ETF

My problem is that even on VIX ETFs, and on the VIX itself, ALL associated options contracts are effected strangely by decreasing volatility.

  • I can also sell VIX futures.

The next tricky part for me is balancing the portfolio based on differing margin requirements amongst asset classes. So is there any research paper or article or 'common knowledge' about how to construct this kind of hedge? I could only so far find things about going long volatility.

  • Is it something like a long call ATM LEAP? Is your strategy to gain from a positive delta move or a positive vega move? or both? – Victor123 Mar 26 '15 at 16:21
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    I have no experience using options to hedge, but you're right that those options would themselves be impacted by changing volatility. Hedging with futures, on the other hand, is pretty much what futures were designed for. Shorting the VX simply seems to be out of favor at the moment, since nobody is expecting volatility to decline. (But that's why they call it a hedge!) – dg99 Mar 26 '15 at 16:22
  • @dg99 I'm only looking now because some of my positions got abnormally crushed as VIX dropped from 16 to 13 a few days ago. It is aggravating when they are correct trades but still not profitable due to broad market IV crush. I need to hedge with a small or proportional amount of capital to my core positions, I'm still weighing the possibilities – CQM Mar 26 '15 at 17:56
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    Just curious why you did not think of purchasing some underlying as a hedge. Why go for shorting VIX futures when it will have similar effect as purchasing some long underlying? – Victor123 Mar 26 '15 at 20:34
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    @Victor123 because going long the underlying doesn't hedge what I'm doing. The assumption about what I was trading earlier was not correct. I think your assumption is that price increase = lowered options volatility, this is not an absolute. – CQM Mar 26 '15 at 21:03
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Hedging long delta and long vega?

Why not sell (or more precisely 'write') calls in the security in question?

e.g. AAPL Mar'29 165 Calls have a delta of 52% and an IV of 30%. If the stock goes down or the IV drops, simply buy them back.

Usually you can treat the various option "greeks" algebraically by offsetting the values of one instrument with those of the other. Bearing in mind that as they change, you might need to make adjustments to maintain the offset of the hedge. e.g. as the price of the securities move up and down the delta will change (the gamma).

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