uploaded image

Portfolio Protection: Long VIX

By:Sage Anderson

Despite the completion of the recent US Presidential election, there are still several big events that loom on the horizon before the end of the year.

The big item left in November is the OPEC meeting scheduled on the 30th of this month. The gathering was supposed to mark the official announcement of a coordinated production cut by some of the world’s largest oil producers. However, as seen through the big slide in oil prices over the last few weeks, there are now questions as to whether a deal will ultimately be agreed upon by that date (or any date for that matter).

December looks to be fairly interesting as well with the planned meeting of the US Federal Reserve falling on December 14th, as well as a referendum in Italy at some point before year end.

The extreme range observed in the S&P 500 during and after the recent US Presidential election may have been a signal that volatility could increase in the near term.

If you’re in that camp, you might be considering adding new positions that could potentially protect your investments in the event of a disaster. This would be especially relevant for traders focusing on short volatility and/or long equity strategies.

If you are exploring such protection, a recent episode of Closing the Gap may be a good starting point. The episode (titled: "Portfolio Hedge: Long VIX) focuses on why a VIX trade can make sense during periods of heightened uncertainty.

As outlined early in the show, the SPX and VIX have historically been inversely correlated. That means that as the SPX goes up, the VIX usually goes down, and vice versa. If your own portfolio outperforms when the SPX goes up (long equities or short volatility), you can therefore potentially exploit this relationship by deploying a protective hedge using the VIX.

Closing the Gap breaks the long VIX trade down into 5 easy steps and provides a detailed example for traders to review in the event they are considering this type of structure.

The five steps outlined on the show include:

  • Determine the portfolio's current market exposure

  • Choose how big a selloff to protect against

  • Calculate the corresponding move in the VIX and /VX futures

  • Choose the appropriate long VIX strategy

  • Size the trade to the desired potential protection

In order to get the best possible understanding of this trade, we recommend you watch the entire episode when your schedule allows.

It's important to note that while such a trade may protect your portfolio in the event of a selloff - the trade could lose money if the market sits still or goes higher.

If you have any questions on protective trade structures like the one discussed above we hope you'll follow up at support@tastylive.com or leave a comment below.

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.