A Study in Portfolio Diversification Using VIX Options

16 Pages Posted: 24 Oct 2016

Date Written: April 1, 2016


The search for dependable, low-cost portfolio tail protection or hedge from exogenous events such as the 1987 crash, the 2000 dot-com bubble, the 2008 credit crisis, and the 2011 European crisis continues. This study assesses the performance of a systematic VIX call buying strategy with a defined cost to hedge an equity portfolio from systemic risk. A portfolio manager must weigh these costs against those of hedging strategies that have potentially undefinable costs, for example, protective puts or shorting equity index futures. The analysis shows that a passive allocation to VIX calls has proven effective in large drawdown periods and can be accomplished by spending a relatively small defined percentage of capital when the hedge is not needed. The study applies a set of fixed rules to empirical data with the goal of optimizing ex-post the moneyness and expiry of VIX call options over the period studied. For the period of analysis, the systematic purchase of properly placed VIX calls tends to provide sufficient protection in tail risk events for minimal cost when hedging is not needed.

Keywords: VIX, Call Options

JEL Classification: G10, G11

Suggested Citation

Paoloni, Dominick, A Study in Portfolio Diversification Using VIX Options (April 1, 2016). Journal of Investment Consulting, Vol. 17, No. 1, p. 37-49, 2016. Available at SSRN: https://ssrn.com/abstract=2792358

Dominick Paoloni (Contact Author)

IPS Strategic Capital ( email )

215 S Wadsworth Blvd
Suite #540
Denver, CO 80226
United States

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