When Hedging Stock Portfolios, Resist the Temptation to Speculate on Volatility (VIX)

Adaptive options analytics help explain why speculating on volatility can be a poor way to manage downside risk in stocks.

Index options can be a highly efficient way to manage the downside risk of a stock portfolio, but what about trading the shifting cost of this protection, as measured for instance by the fear-greed index known as the VIX? In a word, options pro Mike Tosaw says, “no”.

Volatility is an asset class—and a potential source of diversification in an asset allocation model—but this is not strictly a portfolio hedge. You don’t buy car insurance to protect your home.

Mike shows the practical implications of this critical distinction using the Adaptive backtest to compare how hedging with index puts compares to bets on the VIX itself. Index put options can help investors get and stay in the market for long-term growth potential, while efficiently positioning to make use of inevitable downturns. This systematic approach to downside protection can also help attract and retain clients.