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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

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

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  • $\begingroup$ Can you give me an example using a long option position, as well as a short option position? $\endgroup$
    – CQM
    Mar 7, 2016 at 22:48
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    $\begingroup$ You mean how many futures to hold? For that you need a model for Vix options. But the proper hedge is clearly the futures with same expiration date as the option. $\endgroup$
    – Alex C
    Mar 8, 2016 at 0:13
  • $\begingroup$ whats carry arbitrage? $\endgroup$
    – Trajan
    May 5, 2018 at 13:15
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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.

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