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Hedging VIX Index Options with VIX Futures

Article Quant Q&A · Author: CQM
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Summary

The document asks how a market maker can delta-hedge VIX index options when the index itself is not directly tradable like shares. One answer identifies VIX futures as the direct hedge, reasoning that the relationship is not based on a carry arbitrage. This provides a practical starting point for understanding the hedge instrument used for exposure to the VIX index.

A second answer emphasizes that the hedge is imperfect. Futures trade in whole contracts, so a desired delta may not map to an exact position, and the response suggests combining options in straddles as another way to offset exposure. These comments are brief and do not provide a quantitative hedge ratio, explain changing sensitivities, or compare hedge effectiveness across maturities. The discussion therefore offers basic instrument intuition rather than a complete market-making or risk-management procedure.

Key ideas

  • VIX futures are identified as the direct hedging instrument for VIX index option exposure.
  • The hedge relationship differs from ordinary stock-option delta hedging because the index is not directly tradable.
  • Whole-contract futures trading can prevent an exact match to a target hedge size.
  • Option combinations such as straddles may provide another way to offset some exposure.
  • The discussion does not specify hedge ratios or quantify residual basis and maturity risk.

Tags

OptionsFuturesVolatilityMarket makingRisk management
Full text
# How do market makers hedge VIX index options?


# How do market makers hedge VIX index options?












With equity options, many market makers hedge by buying or selling the underlying asset in correspondence with the option's delta.

For example, if the market maker wrote 1 call option with a delta of .7 then they buy 70 shares.

How would one delta hedge with VIX options, where there are no underlying shares on the index.

Available options could include a cross-asset weighted portfolio with VIX ETF shares/nav units. Some kind of concoction with different VIX futures at differing margin levels. Or further recreating a leveraged fraction of the VIX term structure with S&P options.

Any insight appreciated

## Answer by eltigrechino (score 6)

https://quant.stackexchange.com/a/24743

Due to the lack of a carry arbitrage, VIX futures are actually the direct hedge for VIX Index options

## Answer by HyperVol (score 1)

https://quant.stackexchange.com/a/25084

VIX index options can never be perfectly hedged, given the fact that VIX futures are traded in lots, not as standalone contracts like equities. Hence we cannot always have 'x' futures to short.

However, the closest you can achieve here is by using straddles (buying puts against long call positions to hedge).

Besides I'm not aware of VIX ETFs if any, so wouldn't advise on those lines.

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.