Hedging Short VIX Futures with SPY Shares

Summary

The note describes an approximate way to hedge a short VIX futures position using SPY shares. It first estimates the beta of the relevant VIX futures contract relative to SPY, then scales that beta by the stated contract multiplier and SPY price to obtain a share hedge ratio. The ratio is rounded to estimate the number of shares per contract; the document does not provide a beta value, so it does not calculate a specific share count for the example.

The hedge ratio changes over time as the futures contract approaches maturity. The approach can also fail to offset losses when the VIX futures curve shifts into backwardation or volatility expectations change independently of SPY’s price. For a more direct delta hedge, the answer suggests replicating VIX exposure with SPY options and hedging that position with SPY. This is a simplified cross-asset hedge, not protection across all market conditions.

Key ideas

• Estimate the VIX futures contract’s beta to SPY to form an approximate share hedge ratio.
• The ratio changes as the futures contract rolls toward maturity.
• A SPY hedge may not offset curve shifts or changing volatility expectations.
• A more direct delta hedge would replicate VIX exposure with SPY options and hedge with SPY.

Tags

# How to hedge a short VIX position with SPY


# How to hedge a short VIX position with SPY












Assuming it's Nov 15th, and the SPY is trading at 217.2. Suppose I sell 11 contracts with Dec. 21 maturity. How many shares of SPY do I buy to hedge my VIX futures position?

## Answer by PlantFox (score 4)

https://quant.stackexchange.com/a/42848

Calculate the beta of the VIX Dec 18 contract to the SPY. Then apply this equation:

$$\ hedge \ ratio = \frac{1000\beta}{SPY_{price} } $$

You then take the hedge ratio round it and that will give you the approximate amount of shares to hedge with. This is a simple solution. There are other ways to calculate the hedge ratio.

Just as a note, this will change everyday as the contract's beta increases as it rolls down the curve. Also, this will not hedge you against all situations. An example would be where the vix curve enters backwardation or expectations of future volatility shift with a price shift in spy.

Keep in mind, this hedging strategy might not work as you are try to hedge a product which is based on future expectations of volatility with a product that is priced based on different present factors. If you really wanted to hedge (delta neutral) , you should recreate the vix with spy options and then delta hedge with spy.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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