Beyond 0dte Report: Issued 2023-07-24 Ref Px: $4,538
In light of potential bearish factors highlighted in our recent daily report, including post-OPEX weakness, VIX seasonality, and extreme bullish sentiment, this thesis advocates for the strategic use of VIX calls over SPX downside puts for hedging purposes.
The VIX possesses a natural lower bound (around 11-13), 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, while the VIX often moves sideways at its lower bound for extended periods.
This means 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 moves in times of pessimistic sentiment, providing an asymmetric risk-reward.
As part of my overall market strategy, I am currently long on 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 plan to be more active, booking profits during spikes and adding to my long positions on pullbacks, aiming to enter a 2:1 ratio trade.
In $182, risking 1 to make 4.5 (1:1 ratio)
Please note that this trade position represents my personal strategy and should not be considered as financial advice.