Are VIX calls or SPY puts a better hedge?

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A CNBC segment this week raised a question that has become increasingly common: Which makes a better hedge, VIX calls or SPY puts?

CNBC contributor Brian Stutland recommended a VIX call spread on Tuesday. He suggested buying a June spread, buying the 16 calls for $2.70 and selling the 20 calls for $1.20, paying $1.50 net. At that time, the spread was already in the money.

From research that I have done, the VIX calls really shine when the market tanks and volatility spikes higher, as it did in 2008. But using the call spread means that the gains are capped, even if it does reduce the hefty price of VIX calls.

The S&P 500 ETF (NYSEArca:SPY) puts could be set up in the same manner as this call spread, for better prices and reduced costs. The SPY 133/129 put spread could have been bought for less than $1.50, and there are penny-wide spreads as opposed to $0.05/$0.10 bid/ask spreads in the VIX. (There are also tax considerations, but that is beyond the scope of this article.)

It is misleading to compare specific VIX levels to prices in the SPY but, given the recent action, I think it is fair to assume that if the VIX is above 20 then the SPY would be below 129. So while comparing the two positions is difficult, it does seem that the SPY put spread would make more sense.

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