Why Might a Hedger Choose a Longer-Dated Option Even with High Implied Volatility?
A hedger might choose a longer-dated option despite the high cost (due to high IV) to achieve protection over a longer time horizon, thereby avoiding frequent rolling and its associated roll risk and transaction costs. The longer-dated option also offers a more stable delta, making the hedge ratio more reliable, and a slower rate of theta decay.
Glossar
High Implied Volatility Impact
Trigger ⎊ High implied volatility in cryptocurrency options signifies an anticipated substantial price movement, often preceding significant market events or shifts in investor sentiment.
Short Dated Crypto Futures
Instrument ⎊ These are standardized contracts obligating the holder to buy or sell a specific cryptocurrency at a predetermined price on a near-term expiration date.
Short Dated Options Crypto
Definition ⎊ Short Dated Options Crypto refers to derivative contracts on digital assets that have a relatively brief remaining time until their expiration, typically ranging from a few days to a few weeks.
Long Dated Contract Risk
Risk ⎊ Long dated contract risk refers to the specific set of exposures associated with options contracts that have extended time horizons, typically exceeding one year.
Cryptocurrency Hedging Techniques
Mitigation ⎊ Cryptocurrency hedging techniques represent a suite of strategies employed to reduce portfolio exposure to adverse price movements within the digital asset class.
Break-Even Formula for Crypto
Formula ⎊ The mathematical expression determining the crypto asset price at which the net profit or loss of a derivative position equals zero.
Break-Even Point Concept
Concept ⎊ The break-even point represents the specific price level of the underlying asset where a derivatives position transitions from a state of loss to a state of profit.
Options Break Even Point Definition
Calculation ⎊ The options break even point represents the price at which the underlying asset must trade at expiration for the option holder to neither profit nor incur a loss, factoring in the premium paid.
Break Even Point
Threshold ⎊ In cryptocurrency derivatives and options trading, the break-even point represents the price level at which a trading strategy ceases to incur a loss and begins to generate profit.
Upper Break Even Point
Point ⎊ The upper break even point is the specific price level of the underlying cryptocurrency asset above which a bullish or non-directional options strategy begins to realize a net profit.