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Hedging a Down-and-In Bitcoin Put with Futures and Options

Article Quant Q&A · Author: assangar
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Summary

The document asks how a market maker might hedge a short position in down-and-in Bitcoin puts. Its answer contrasts these barrier options with vanilla puts and gives two possible risk-management actions: use Bitcoin-dollar perpetual swaps or dated futures to offset some directional exposure, or buy options back to reduce some volatility exposure. The option repurchase could use the same strike or another strike selected to fit the broader book’s spread positioning.

This is a brief suggestion rather than a complete hedging framework. It does not explain barrier-specific risks such as knock-in probability, changing delta near the barrier, or gap risk, and it gives no pricing, sizing, or performance evidence. The proposed hedges are examples to consider, not a demonstrated best practice.

Key ideas

  • Perpetual swaps or dated futures can be used to offset some directional exposure from short Bitcoin puts.
  • Repurchasing options can reduce some volatility exposure.
  • A market maker may choose the repurchase strike based on the position’s fit with the rest of the book.
  • The response does not provide a full method for managing barrier-trigger or gap risk.

Tags

CryptoOptionsFuturesPerpetual futuresVolatility
Full text
# Hedge a down-and-in BTC put?


# Hedge a down-and-in BTC put?












What’s the best way to hedge a down-and-in BTC put?

I am not quite sure what the best practice here would be and would love to get some guidance.

Thanks

## Answer by user68819 (score 0)

https://quant.stackexchange.com/a/77726

OK so down and in puts are very different from vanilla puts. The latter are fairly straight forward if settled in USD(T). If I were a MM and I had sold a bunch of puts, outside of directly closing my position out in the market, I may choose to delta hedge some of this, for eg using BTC/USD perps (or dated futures), if i wanted to hedge some of the vega I may choose to buy back the same strike or some other strike which I may prefer on a spread basis for the rest of my book.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.