Backtesting Digital Currency Options and Hedged Position Combinations
Summary
The document introduces a backtesting system for European-style Bitcoin options and explains how option contracts are identified, priced, traded, and monitored alongside spot or futures positions. Its examples sell a call while buying spot or futures, then combine the legs’ reported profits to track the position. These combinations illustrate how options can hedge some downside exposure for an asset holder, while the futures version uses less capital at the cost of greater risk.
The discussion is introductory rather than an empirical evaluation: it provides sample strategy code but reports no backtest performance. It cautions that losses in the underlying can exceed the protection provided by the option premium and notes that limited options liquidity may make counterparties difficult to find. Bull call and bear put spreads are mentioned as further combinations, without detailed implementation or analysis.
Key ideas
- The described options are European-style contracts with Bitcoin as the underlying and a contract value of one BTC.
- An option premium is paid by the buyer, who receives the right to exercise while the seller takes on the corresponding obligation.
- Selling a call while holding spot or a long futures position is presented as a hedge for an asset holder.
- Futures can require less capital than spot but carry higher risk in the illustrated combination.
- The examples do not establish profitability and leave liquidity and downside exposure as important limitations.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.