Assuming it's Nov 15th, and the SPY is trading at 217.2. Suppose I sell 11 contracts with Dec. 21 maturity. How many shares of SPY do I buy to hedge my VIX futures position?
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1 Answer
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Calculate the beta of the VIX Dec 18 contract to the SPY. Then apply this equation:
$$\ hedge \ ratio = \frac{1000\beta}{SPY_{price} } $$
You then take the hedge ratio round it and that will give you the approximate amount of shares to hedge with. This is a simple solution. There are other ways to calculate the hedge ratio.
Just as a note, this will change everyday as the contract's beta increases as it rolls down the curve. Also, this will not hedge you against all situations. An example would be where the vix curve enters backwardation or expectations of future volatility shift with a price shift in spy.
Keep in mind, this hedging strategy might not work as you are try to hedge a product which is based on future expectations of volatility with a product that is priced based on different present factors. If you really wanted to hedge (delta neutral) , you should recreate the vix with spy options and then delta hedge with spy.
