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Estimating a VIX ETF Hedge for a Long Stock Position

Article Quant Q&A · Author: Victor123
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Summary

The document asks how to size a position in a volatility ETF to offset the market exposure of a long stock position. It compares this proposed hedge with using an at-the-money covered call to bring the position’s delta to zero, and notes the tendency of the volatility ETF to move opposite the broad stock market. The example uses SPY and VIXY, but it does not provide a sizing formula or a worked calculation.

The key issue is that inverse movement alone does not establish a stable hedge ratio: the relationship between a stock or index and a volatility ETF can vary over time. The document is therefore a question rather than a tested strategy. It gives no empirical evidence, estimation window, rebalancing rule, or discussion of the volatility ETF’s construction and tracking behavior, all of which would matter when evaluating hedge effectiveness.

Key ideas

  • A volatility ETF may move opposite a broad equity index, suggesting a possible hedge for a long position.
  • The document asks how to estimate the number of ETF shares needed to hedge a stock position.
  • It contrasts the proposed hedge with using an at-the-money covered call to offset delta.
  • The document provides no hedge ratio, empirical analysis, or rebalancing method.

Tags

EquitiesVolatilityOptionsRisk managementPosition sizing
Full text
# How to hedge a long stock with the corresponding volatility ETF


# How to hedge a long stock with the corresponding volatility ETF












Let us say I want to establish a market neutral position. So if I buy 50 shares of stock (SPY) and I want to delta hedge, I sell an ATM covered call. So that brings the position delta to 0.

Now, I could have also hedged by buying the corresponding volatility ETF VIXY. Since when SPY goes up, VIXY goes down. And vice versa.

So how can I figure out how many shares of VIXY to buy to hedge approximately 50 shares of SPY.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.