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.

  • 1
    $\begingroup$ Could you specify what you like to hedge? Do you want to remove volatility risk, beta, both, minimize variance or something else? Also note that "when SPY goes up, VIXY goes down" is only partially correct since, according to my data, annual correlation is currently at about -0.81. So maybe you can generalize your question? $\endgroup$
    – RndmSymbl
    Feb 13 '15 at 11:11
  • $\begingroup$ I would like to remove directional bias buy purchasing SPY and VIXY. Now what should be the ratio of SPY:VIXY...how to calculate that? $\endgroup$
    – Victor123
    Feb 13 '15 at 15:15
  • $\begingroup$ I think I still don't understand your question because to me SPY looks like buying pure market direction. Can you elaborate why building an equal amount in a short position to your long position or weighting your short by the correlation coefficient between long and short asset is not applicable? $\endgroup$
    – RndmSymbl
    Feb 13 '15 at 19:44
  • $\begingroup$ Got it thanks.. I need to hedge by the correlation coefficient between vixy and spy. It is there hidden in your comment. thank you $\endgroup$
    – Victor123
    Feb 13 '15 at 21:45

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