Hedging VIX Futures and Options with SPX Straddles
Summary
The discussion considers trading differences between volatility implied by SPX options and volatility reflected in VIX futures. One response describes liquidity providers hedging VIX futures or options with SPX straddles, adjusting those hedges several times during the day. Another trader describes hedging with ratios of VIX futures across expirations. These are practical approaches to managing exposure when products do not line up cleanly.
The responses emphasize that the instruments have different expirations and contract notionals, leaving imperfect hedges and timing risk. The original question notes that replicating VIX futures would require dynamic option trading across strikes and assumptions about volatility of volatility. A response mentions a possible trading edge and the mean reverting behavior of VIX, but gives no supporting data, methodology, or risk-adjusted performance evidence. The accounts are anecdotal, so they offer implementation clues rather than a validated strategy or a reliable estimate of profitability.
Key ideas
- SPX options, VIX options, and VIX futures differ in expiration and notional, complicating hedges.
- Liquidity providers may hedge VIX exposures with SPX straddles and update positions during the day.
- Hedges remain imperfect and introduce timing risk.
- A separate approach described is pairing VIX futures across expirations in a ratio.
- The discussion offers practitioner anecdotes, not a documented performance study.
Tags
Full text
# SPX options vs VIX futures trading # SPX options vs VIX futures trading Forward volatility implied by SPX options, and that of VIX futures get out of line. If there existed VIX SQUARED futures they could easily be replicated (and arbitraged) with a strip of SPX options. However replicating VIX futures would theoretically require dynamic trading in options (all strikes) and is also would depend on the model for distribution of vol of vol. Question for traders: have you or someone you know ever traded SPX options (variance) vs VIX futures, and if yes then please provide some clues. Please don't write that there is an academic article about this; I'm asking if someone did this is practice. ## Answer by glyphard (score 10, accepted) https://quant.stackexchange.com/a/290 Short answer: yes. Long answer: the challenge in trading these things, like you mentioned, is that each contract is not perfectly hedgable. This is an intentional choice made by the exchanges that list these products, so that they can provide an incentive to trading firms(locals) to provide liquidity for these new products and help boost trading volume. The primary challenge in trading spx options vs vix futures, or spx options vs vix options, or vix options vs vix futures, is the fact that all three have different expirations. This fact combined with the wildly different notionals for each (vix futures = 1000*vix, vix options = 100 * vix, and spx = 250*vix) makes it more difficult to hedge and trade one versus the other. What most liquidity providers do instead of trying some kind of variance-gamma model approach is to simply hedge vix options or vix futures using spx straddles, and updating their hedges several times a day. This isn't a perfect hedge, and has lots of additional timing risks. However, there is something like 1% to 1.5% edge in trading this approach, so levering up can make it a reasonable strategy when considered with mean reverting nature of vix. ## Answer by user712 (score 0) https://quant.stackexchange.com/a/944 I trade VIX futures exclusively. My hedge is one VIX future pair vs. another future pair in a ratio. Thorough understanding of these and screen time are necessary IMO to earn.
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