Portfolio 1 — Trade Alert : VIX covered-call hedge — two sizes (small & large account)
Putting last night's Office Hours straight to work. We added a long VIX future as a volatility hedge and sold VIX calls against it
Dear GYP Members:
Putting last night’s Office Hours straight to work. We added a long VIX future as a volatility hedge and sold VIX calls against it to finance the carry — a covered call on our crash insurance.
Below are two versions: one sized for a small account (Micro /VXM) and one for a larger account (full /VX). Same idea, scaled to the book.
One honest caveat up front: we prefer to put this hedge on when VIX is below 19 — you buy the volatility cheaper, with more room to run and less risk of the future mean-reverting against you. With VIX cash near 19.4 and the July future we actually trade at ~20.3 — just above our preferred sub-19 zone — this is not an ideal entry. Treat this alert as an educational walk-through of the structure — exactly how we’d build it — rather than a perfectly-timed trade.
Regime Read
Volatility: After the recent pullback, VIX cash is ~19.4 and the July future we trade is ~20.3. We want crash protection on, but we don’t want to pay full carry for it — so we sell calls to subsidize the hedge. Note our preference: we’d rather establish this with VIX under 19 (buying volatility cheaper, more room to run, less mean-reversion risk). With the future just above that sub-19 zone, today’s entry is instructional rather than optimal — we’re paying a little up, not getting it cheap.
Momentum: A long VIX future profits if fear returns and volatility spikes; the short calls cap that upside above the strike in exchange for premium today.
Catalyst: This is a structural hedge add, not an event bet — built calmly, before the next shock, exactly as we discussed last night.
Decision Framework — the three rules from Office Hours
Choose the strike by DELTA — and anchor to the FUTURE, not the VIX cash index. This was the big “aha” from the session: VIX options are priced off the future, not the VIX you see quoted. With the July future at ~20.3 (even though VIX cash printed ~19.4), the at-the-money strike sits at the future — ~20.3 — and your platform’s “at-the-money” and delta labels will mislead you because of the skew. So anchor to the future price and sell at or above it — which is exactly what we did: the 20.5 (Micro) and 21 (full /VX) strikes both sit just above the ~20.3 future. Then, because the call skew is enormous, hunt for the delta you want and take whatever strike it lands on.
Sell calls in the SAME month as the future — match the letters. We’re trading the July future, so we sell July VIX calls. VIX futures are month-by-month and cash-settled, and each month has a code: July = N, August = Q, September = U. The /VXN (July) future settles to the July options; the Micro is /VXMN. Do not sell August or September calls against a July future — they track a different forward and won’t behave the way you expect.
Size the coverage to the future. One /VX ≈ ten VIX options of notional (and one /VXM ≈ one VIX option). Ten calls fully covers a /VX, but partial coverage (2, 5, 7…) is completely fine — fewer calls = more upside left on the hedge, more calls = more income and a tighter cap.
Why / the risk: the short calls cap the hedge’s payoff if volatility explodes well past the strike — you give up some of the crash convexity for premium that lowers your carry. Keep the hedge appropriate, not dominant; a hedge that’s too big becomes the position.
The Education Behind It — Why a VIX Covered Call
This trade only clicks once you understand the problem it solves. Straight from last night’s Office Hours:
Every premium-selling portfolio is quietly short vega. We collect theta selling puts and spreads — but that means rising volatility hurts us. In a real sell-off you take a triple hit: delta against you, gamma against you, and vega against you, all at once. Most traders watch delta and theta; far fewer realize how much short-volatility risk they’re carrying until the day it actually bites.
The fix isn’t to turn bearish — it’s to own long vega. Something that gets more valuable when volatility rises. That cushions the drawdown, steadies your decision-making, and frees up buying power exactly when everyone else is being forced to sell.
VIX is the purest long-vega hedge there is. When markets fall, fear rises and VIX rises — directly, and often faster than equities themselves. A long VIX future is about as clean an expression of “pay me when things break” as exists.
But pure volatility has a cost: carry. Volatility mean-reverts — it spikes, then collapses — so a long VIX future tends to bleed in calm markets. To put a number on it: if volatility just sits, a full /VX future loses roughly $1,000 a month in carry. That’s the catch with any standalone long-vol hedge: wonderful in a crash, expensive to just sit and hold — which is also why we prefer to establish it cheap (VIX under 19), so we’re not buying a high basis we then have to bleed back down.
So we turn it into a covered call. Selling a VIX call against the long future brings in premium that offsets that carry — the same way a covered call on a stock chips away at your cost basis. The math is the whole point: against one /VX, those 10 calls brought in ~$2,000 — more than the ~$1,000/month carry, so the hedge becomes roughly self-financing. (The Micro scales 1:1 — ~$200 of premium against a proportionally smaller bleed.) You give up the explosive upside above the strike in exchange.
And here’s why that premium is so rich: nobody wants to be short VIX calls. One bad headline and VIX can double — so traders pile into upside protection and refuse to sell it, which gives VIX calls enormous skew (far-OTM calls still hold real value, while VIX puts go for nickels — everyone fears the upside, not the downside). A naked short VIX call is how you get wiped out. But sold covered against a long future, you get to harvest that rich skew with the future capping your risk. That’s the structural edge of the trade — and exactly why we pick the strike by delta off the future, not by price.
The whole point: long-vega protection, made cheap enough to live with — sized as appropriate exposure, never letting the hedge become the position.
Tony Rihan`s Commentary
This is exactly what we walked through in Office Hours last night, now put on as a live trade.
The long VIX future is our volatility hedge — it goes up when the market gets scared. The problem with any long-volatility position is carry: VIX futures tend to bleed in calm markets. So instead of just paying that bleed, we sell a VIX call against the future and let the premium subsidize the cost. A covered call — on our crash insurance.
Two things matter most. First, the skew. VIX calls have enormous call skew because everyone wants upside protection on volatility and nobody wants to be short it. That means you don’t shop by strike — you shop by delta. Find the delta you want to sell, and take whatever strike it sits on. Second, the expiration. Sell the call in the same month as the future you’re hedging. We’re in the July contract, so we sold July calls. Selling an August or September call against a July future is a mismatch — those options are tied to a different forward and won’t behave the way you expect against this position.
We did it small (one /VXM, one call) and large (one /VX, ten calls) to show the same idea at both account sizes. The micro lets a smaller account run the identical hedge without the ~$6,000+ of buying power a full /VX can require (it varies by broker and by volatility) — appropriate exposure, not maximum exposure.
That’s the whole philosophy: own the long-vega protection, but make it capital-efficient so you can actually afford to keep it on when it matters.
— Tony Battista & Tony Rihan Grow Your Pile
Educational only — not investment advice, a recommendation, or a solicitation. Strikes, prices, and figures are the actual fills in our model Portfolio 1; they will not match your fills and are not suitable for every account. VIX futures (/VX, /VXM) and VIX options are leveraged, settle to a volatility index, and can move sharply; selling calls caps the hedge’s upside and short options carry assignment/loss risk. Match option expirations to the future’s contract month. Size and manage every position to your own account, buying power, and risk tolerance, and consult a licensed professional. Past performance does not guarantee future results.