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Suppose a short straddle.

In practice, hedging with long/short futures exposes to the risk of hitting a stop loss when market movements are wide. Eventually, it may very well happen that the hedge becomes the main source of loss because of the stop.

On the other hand, hedging with VIX future is counterintuitive, as it encompasses continously buying long-term vol and selling short-term one with a generally upward looking vol term structure.

Finally, buying a straddle also doesn't make sense, as the fact that implied vol is usually overpriced makes the hedge expensive.

So my question is, assuming that nothing can be done to change the future stop loss, what is a good practical way of heding short vol?

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    $\begingroup$ Have you considered reducing the position size, to begin with? $\endgroup$ – amdopt Jun 6 at 16:21
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    $\begingroup$ If you have a stop-loss on a hedge something is wrong... $\endgroup$ – noob2 Jun 6 at 18:07
  • $\begingroup$ @amdopt, thanks for your answer! The strategy consists in shorting calls in quantity Q and buying futures whose order is filled in at the strike of the option in quantity Q*delta. Anything wrong with this approach? $\endgroup$ – Vitomir Jun 8 at 9:46
  • $\begingroup$ Nothing is wrong with your approach on the surface but understand that the comment by @noob2 should also be considered and that I have no context of what the overall goals are for the account/portfolio so I don't really know if anything is 'wrong'. Sorry I can't be of more help. Perhaps a question with a but more detail is in order? $\endgroup$ – amdopt Jun 8 at 10:29
  • $\begingroup$ A hedge is risk-reducing and therefore good to have. The losses on the hedge are "financed" by profits on the main position and so are not usually a concern. There can be problems if for example the two positions are at two different brokers and there is a delay in transferring profits from one to the other. Or if the hedging error is very large relative to your capital, but this can be mitigated by having enough capital relative to the size of your positions so you can survive all normal situations without taking off the hedge. $\endgroup$ – noob2 Jun 8 at 12:48

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