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Tom Preston Explains When to Hedge With VIX or SPX
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ticker lesson
Breakdown
0:00lesson
Ratio spreads and risk management
- Ratio spreads involve buying one out of the money put and selling two further out of the money puts
- Extra short option risk is accepted if it generates enough credit
- High probability of expiring worthless or profit is key
- Risk and capital requirements must be handled
2:01lesson
Criteria for ratio spreads
- Check for rich enough skew to justify the trade
- Apple example at 335 with 320 and 350 targets
- Call skew is present but not significant
- Ratio spreads are expensive and require specific targets
3:42lesson
VIX vs SPX hedges
- VIX options hedge different types of stress than SPX puts
- VIX is forward-looking and based on futures
- SPX puts hedge against drift or crash scenarios
- Hedge positioning depends on the path of risk
5:54lesson
AM settlements and risk
- AM settlements create settlement risk at the open
- No real-time management of opening print
- Settlement prices take time to generate
- Avoid short strikes close to market open
7:39lesson
Interpreting put skew
- Put skew is a warning signal, not necessarily overpricing
- Market perceives risk in the upside or downside
- Check context: volatility, liquidity, rates, and fundamentals
- Avoid looking at any single metric in isolation
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