tastytrade logo
uploaded image

Nov 11, 2016

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@tastytrade.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

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) 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, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, 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. tastytrade 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), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks 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 tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

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

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, 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 Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.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 tastytrade’s podcasts as necessary to view for personal use.