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VIX Calls vs SPX Puts

Beyond 0dte Report: Issued 2023-07-24 Ref Px: $4,538

In light of potential bearish factors as we’ve highlighted in our recent daily report, including post OPEX weakness, VIX seasonality, and extreme bullish sentiment, this thesis advocates the strategic use of VIX calls over SPX downside puts for hedging purposes.

The VIX possesses a natural lower bound (around 13-11), meaning volatility rarely trades below this zone, particularly in a weakening macro environment.

During low volatility periods, downside puts may yield diminishing returns as equities grind higher but the VIX often moves sideways at its lower bound for extended periods.

Meaning, VIX calls exhibit greater price stability and are less likely to move significantly further out-of-the-money (OTM) compared to SPX downside puts. The VIX's sensitivity to market fear and uncertainty leads to sharp upward movements in times of pessimistic sentiment providing asymmetric risk reward.

As part of my overall market strategy, I am currently long the S&P, and have overwritten calls to generate yield as I expect a pullback over the next month or two. To further bolster my risk management approach and address tail risk, I have recently added VIX calls to my portfolio. I will be a little more active, booking profits into spikes and adding to my long leg on pullbacks looking to enter a ratio trade of 2:1. In $178, risk 1 to make 4.5.

Please note that this trade position represents my personal strategy and should not be considered as financial advice.

*This chart shows why VIX calls are the best way to hedge equities.


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