Comments on “Using VIX Futures as Option Market-Makers’ Short Hedge” Professor San-Lin Chung Department of Finance National Taiwan University

Summary of the paper This paper investigates the performance of delta-vega neutral hedging for S&P 500 index (SPX) futures call option writers. The vega hedging are implemented using two alternative strategies, i.e. the forward-start straddle and the VIX futures. Two alternative models, the stochastic volatility (SV) model and the stochastic volatility and price jumps (SVJ) model, are applied to calibrate the parameters and to calculate the hedge ratios. 2

Summary of the paper This authors use the average absolute hedging errir and average dollar-value hedging error to measure the hedging performance of alternative models and strategies. The empirical findings suggest that (1) the VIX futures contract us a more efficient instrument to hedge the volatility risk than the forward-start straddle, (2) the SV model coupled with the VIX futures contract achieves the best hedging effectiveness for most cases except for short-term options during the post-crash-relaxation period. 3

Questions and Comments The topic is interesting and I enjoy reading the paper. I have few questions and comments as follows. 1.This paper focuses on hedging the short position of SPX futures call options traded in CME. However, I suggest the authors to consider the SPX call option traded in CBOE. This is because SPX options are European options while the SPX futures options are American options The trading volume of SPX options are time times more than that of SPX futures options.

Questions and Comments Both VIX futures and SPX options are traded in CBOE and thus the authors may avoid the market microstructure issues. 2.The authors may want to explain why more SPX option samples (29.9%) than SPX futures option samples (10.5%) are excluded. 3.I don’t understand why the hedging errors are generally large. For example, the average price of short-term DOTM SPX call options is only around 6 points but the average absolute hedging error (1- day revision) under the SVJ model coupled with the forward-start straddle strategy is points! The hedging error is five times more than the price.

Questions and Comments 4. In page 31, the authors state that “Improvement by the stochastic-volatility models (SV and SVJ) is more evidence…”. How do you obtain this conclusion? You did not compare your results with the hedging performance under the Black-Scholes model. 5. The authors may want to compare their results with the hedging performance of simple delta hedging. This can justify the importance of vega hedging if the hedging performance of delta-vega hedging outperforms that of simple delta hedging.

Questions and Comments 6. Figure 1 is not correct because the figures for VIX options are exactly the same as those of VIX futures.