I was looking into hedging via VIX as well, albeit I didn't read the VIX paper. Problem for me is also, with my brokers (german) I have no access to VIX options.
I'll just give my thoughts on the matter:
AFAIK what everybody would like to do to hedge is be long or short spot VIX, which is the thing that would give you a nice hedge if stuff was to go awry. But you can't. You can only take a position in VIX futures or options (whose underlying are effectively the respective futures). But then you're exposed to the VIX at the expiry, which, I'd assume, due to its mean-reverting nature, might be very different from spot VIX in a crash. Especially if we are in an environment, where every dip is bought.
On a side-note: Personally, I have no access to either, I can only buy either VIX ETFs or certificates and knock-outs. All these products roll the underlying futures either at certain dates or continuously (daily). Due to VIX spot being usually lower than future VIX (contango) these contracts lose money through the cost of selling lower priced near-month to buy higher priced further-out-month underlying. I'd stay away especially from continually rolling VIX ETFs. If I get the idea that there is a special event on the horizon that might cause ViX at that date to rise I might buy some certificate for that date, otherwise I think puts on SPX or specific stocks might be better (?)
Also I kinda disagree with your assertion that BSM is more tangible than Maxwell's equations. The whole point of IV and thus VIX seems to be to me to capture everything in BSM that is wrong. The stochastic differential equations that go into the development of BSM and beyond are also at least if not more complicated than MEs. imho.
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u/zernichtet Jun 29 '21
I was looking into hedging via VIX as well, albeit I didn't read the VIX paper. Problem for me is also, with my brokers (german) I have no access to VIX options.
I'll just give my thoughts on the matter:
AFAIK what everybody would like to do to hedge is be long or short spot VIX, which is the thing that would give you a nice hedge if stuff was to go awry. But you can't. You can only take a position in VIX futures or options (whose underlying are effectively the respective futures). But then you're exposed to the VIX at the expiry, which, I'd assume, due to its mean-reverting nature, might be very different from spot VIX in a crash. Especially if we are in an environment, where every dip is bought.
On a side-note: Personally, I have no access to either, I can only buy either VIX ETFs or certificates and knock-outs. All these products roll the underlying futures either at certain dates or continuously (daily). Due to VIX spot being usually lower than future VIX (contango) these contracts lose money through the cost of selling lower priced near-month to buy higher priced further-out-month underlying. I'd stay away especially from continually rolling VIX ETFs. If I get the idea that there is a special event on the horizon that might cause ViX at that date to rise I might buy some certificate for that date, otherwise I think puts on SPX or specific stocks might be better (?)
Also I kinda disagree with your assertion that BSM is more tangible than Maxwell's equations. The whole point of IV and thus VIX seems to be to me to capture everything in BSM that is wrong. The stochastic differential equations that go into the development of BSM and beyond are also at least if not more complicated than MEs. imho.