{"id":6881,"date":"2022-02-12T15:15:16","date_gmt":"2022-02-12T07:15:16","guid":{"rendered":"https:\/\/slashtraders.com\/?p=6881"},"modified":"2025-09-29T17:36:39","modified_gmt":"2025-09-29T09:36:39","slug":"vix-hedging-strategy","status":"publish","type":"post","link":"https:\/\/slashtraders.com\/en\/blog\/vix-hedging-strategy\/","title":{"rendered":"VIX Hedging Strategy: How a $4,448 Hedge Returned $43,634 in the 2020 Crash"},"content":{"rendered":"

When we choose different options strategies to trade at different relative volatility<\/a>, namely sell options at high IV, and buy options at low IV, we can use VIX to learn more about the market sentiments on volatility.<\/p>\n\n\n\n

Today we\u2019ll share with you how VIX works and alternate ways to hedge your portfolio with VIX.<\/p>\n\n\n\n

What Is VIX?<\/h2>\n\n\n\n

The VIX index was introduced in the early 90s, and it measures the near-term 30 days implied volatility or expected move, of the S&P 500 stocks.<\/p>\n\n\n\n

It measures the expected annualised move from now till the expiration in 30 days calculated based on all SPX options prices.<\/a> Since the SPX index is the largest stock market index in terms of aggregated market cap, globally every market participant uses the VIX as a measure of the volatility of the stock market as a whole.\nSo VIX represents the SPX index annualised expected move for one standard deviation.<\/p>\n\n\n\n

\"5
VIX fluctuated between 8 and 85 in the last 5 years.<\/figcaption><\/figure>\n\n\n\n

The VIX on 2021\/10\/21 is 15.01, which means the market expects a 68% probability (+\/- 1 standard deviation of a normal distribution) that the S&P 500 will move within a range of +\/- 15.01% in the next 12 months. With the SPX at 4549.78, it correlates to an expected movement between 3955.98 and 5232.70.<\/p>\n\n\n\n

As the market generally expects the stock market to be bullish in the long run, when the SPX moves upward, the VIX will generally go down. But when the market crashes, the VIX will rise sharply, leading to the general feeling that VIX represents the fear index of the market.<\/p>\n\n\n\n

Since its inception, the VIX has been moving in a range of 10 to 80, while staying between 11 and 20 most of the time. The 5-year average of VIX is at around 15, whereas the 30-year average is closer to 20.<\/p>\n\n\n\n

Just before the 2020 crash, the market was moving at historically low volatilities, whereas in the 1990s the general volatility level was significantly higher.<\/p>\n\n\n\n

There are weekly and monthly options available on the VIX that we can trade to profit from exploding or collapsing of volatility.<\/a><\/p>\n\n\n\n

Unlike stocks where options can be settled in shares<\/a>, VIX options are settled in cash. Holding VIX options to expiration will affect the cash balance of your account, without any assignment of shares.<\/p>\n\n\n\n

\"vix
There are weekly and monthly VIX options available, and they are always settled in cash.<\/figcaption><\/figure>\n\n\n\n

Here at SlashTraders, we never hold options to expiration except when we sell Cash-Secured Puts to acquire shares at a discount.<\/a><\/p>\n\n\n\n

Impact of Volatility on Neutral Options Strategies<\/h2>\n\n\n\n

Given the advantages of Iron Condors<\/a>, such as high premium and defined risks, it is tempting to trade a neutral options strategy all the time and benefit from the lack of price movements in the underlying.<\/p>\n\n\n\n

The Cboe S&P 500 Iron Condor Index (CNDR) is the closest thing to answering how selling a 30-day expiration Iron Condor<\/a> on the SPX would perform over time.<\/p>\n\n\n\n

The CNDR index<\/a> performed around 690% since its inception in 1986, while the S&P 500 generated a return of 5,500% in the same period.<\/p>\n\n\n\n

This means an Iron Condor strategy isn't the best option strategy to increase S&P 500 returns<\/a> over the long term.<\/p>\n\n\n\n

If we compare the VIX with the performance of CNDR over time, we can see greater profitability in CNDR usually coincides with a reversion of high VIX to the mean.<\/p>\n\n\n<\/p>\n\n\n\n

\"cndr
The greatest CNDR performance usually occurred when VIX reverted to the mean after an expansion.<\/figcaption><\/figure>\n\n\n

<\/p>\n\n\n\n

Hence, we tend to only trade Iron Condors and Strangles<\/a> after massive volatility spikes<\/a>, before the volatility reverts to normal levels.<\/p>\n\n\n\n

When to Enter VIX Hedging Positions<\/h2>\n\n\n\n

Since we see the VIX is inversely correlated to the S&P 500 index, when S&P 500 drops, VIX will increase sharply. During the 2020 crash, VIX jumped from 12 to 85; in 2009, it jumped from 16 to 90; and VIX went as high as 49 in both 1998 and 2001.<\/p>\n\n\n\n

An advanced option Greek, vomma measures the sensitivity of vega, while VVIX<\/a> does the same for VIX. Therefore, VVIX moves as a precursor to VIX. Whenever VVIX crosses above 20 on the RSI, exiting an oversold condition, we can enter a VIX hedging position.<\/p>\n\n\n\n

On 2020\/2\/18, the VVIX crossed above the RSI 20 level and triggered a signal to go long<\/a> on VIX at 16. As expected the VIX jumped to 23 on 2020\/2\/23.<\/p>\n\n\n\n

\"slashtraders<\/a><\/figure>\n\n\n\n

Hedging With VIX Call Ratio Backspreads<\/h2>\n\n\n\n

If you want to use VIX options to hedge your portfolio, it is important to enter early, before the market crash and before the market expects a crash. If the underlying prices already reflect the expected move, then the hedge<\/a> becomes ineffective.<\/p>\n\n\n\n

A great hedging strategy with VIX options is the Call Ratio Backspread:<\/p>\n\n\n\n