Article by: Jim Fink
Published by: Seeking Alpha
Date: 23 May 2012
“Because VIX calls are based on VIX futures instead of the more volatile “spot” VIX, in the past I suggested that it would be easier to hedge a portfolio against a “black swan” stock market decline using S&P 500 puts-either the cash-settled SPX index puts or the equity-settled SPY ETF puts.
“Well, I stand corrected. In preparing for a conference down in beautiful Palm Beach, Florida, I read two academic studies-one published in 2009 and another published in 2012-that found VIX calls to be a much more effective portfolio hedge than S&P 500 puts. The reason is that most institutional investors (including mutual funds, hedge funds and pension funds) are benchmarked against the S&P 500 and have historically hedged their portfolios almost exclusively by purchasing S&P 500 puts. This institutional buying pressure has bid up their prices dramatically and made S&P 500 puts very expensive hedges for the rest of us. The more expensive a hedge, the less effective it is. By contrast, VIX calls have only been around since February 2006 and have yet to be widely adopted by “big money” institutions. Consequently, the prices of VIX calls have not been bid up by institutions and remain reasonable.”
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