Using the VIX to protect against increased volatility
Written on June 6, 2007 by OptionsRopeaDope
I have been thinking recently about how to use the VIX to hedge against volatility. For example, a short straddle is supposed to count on volatility decreasing over the short term. So theoretically, buying a call on the VIX may allow you to hedge against a jump - the straddle goes bad, but a gain on a VIX call could offset it. This example seems obvious to me, but what about on a condor? is it applicable?
If you establish condors well out of the money, it only stands to reason that only a significant move in a short period of time in your underlying will make the trade unprofitable. Therefore, why not hedge on the VIX, with a call (or several) at the 18 level, or higher?
Although I’m good at math, I don’t know the relation, mathematically, of volatility to a large change in the underlying. Therein lies some of the answer I think, and to the next big question - what is the right ratio of your condor spread to VIX calls?
Got to keep this on my list of things to roll over in my head many, many times.
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