This segment is all about vega (volatility measure) and how it relates to the deltas in your portfolio which can enable you to hedge your portfolio against volatility risk. Various trading days are highlighted to show the market moves and how vega acted.
Implied volatility (IV) generally increases as the market goes down. That means traders who are short puts, which have a positive delta and a negative vega can experience quick losses on a strong down move if not hedged.
To hedge the position we can either add short deltas or positive vega. The question is how many negative deltas are needed to offset a bump up in IV? We looked at the relationship between /ES and /VX on different days to come up with an answer.
A table was displayed of the correlation between the /ES (S&P 500 futures) and the /VX (VIX Futures) on August 24th, 2015. The table included the daily change and the notional value of change of both futures. Information from two other days was provided in a similar fashion. A “back of the envelope” calculation was determined. This is not exact but helpful. A follow-up segment for larger moves will be done in the future.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the the takeaways, as well as other important information about understanding vega and a formula for hedging volatility risk.
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