Define ‘Hedging’ Using Options.
Hedging with options is the strategy of using option contracts to mitigate the risk of adverse price movements in an underlying asset already owned or planned to be owned. For example, a crypto holder can buy a put option to protect against a drop in the asset's price, limiting potential losses.
Glossar
Exchange Rate Risk
Volatility ⎊ Exchange rate risk within cryptocurrency derivatives manifests as the potential for losses stemming from fluctuations in the underlying asset’s price relative to a fiat currency or another cryptocurrency, impacting the value of options and other derivative contracts.
Protective Put
Hedge ⎊ A protective put, within cryptocurrency derivatives, functions as a limited-risk strategy employed to mitigate downside exposure in an underlying asset, typically a digital currency holding.
Adverse Price Movements
Volatility ⎊ Adverse price movements, particularly within cryptocurrency derivatives and options markets, represent deviations from anticipated price trajectories, often characterized by heightened instability and accelerated rate of change.
Option Contracts
Agreement ⎊ Option contracts are financial derivatives that grant the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a certain date.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Crypto Holder
Definition ⎊ A crypto holder refers to an individual or entity that possesses digital assets, typically with a long-term investment horizon rather than engaging in frequent trading.