Smile-Adjusted Delta Hedging for Bitcoin Options with Futures and Perpetuals
Summary
This research examines dynamic delta hedging for Bitcoin options using adjustments informed by the implied volatility smile. It compares standard Black–Scholes delta with several smile-based and locally parameterized alternatives, including methods designed to reflect changing market regimes. The study uses hourly historical option prices and synthetic 10-, 20- and 30-day maturities, with hedges rebalanced every eight hours or daily. It also compares dated futures with perpetual swaps, whose closer link to spot can reduce basis exposure.
The reported evidence indicates that smile-adjusted hedges can outperform the basic Black–Scholes hedge in some periods, particularly for out-of-the-money puts and, during upward-sloping smile periods, short-dated out-of-the-money calls. Perpetuals show an advantage in some comparisons, notably in 2021. These findings are conditional on the sample, rebalancing schedule, option maturities and hedge instruments studied; they do not establish a universally superior delta. The supplied document is an excerpt of a longer paper, so its full methods and results are not present.
Key ideas
- The study compares Black–Scholes delta with several smile-adjusted hedge ratios for Bitcoin options.
- Bitcoin implied volatility smiles change shape and can differ from the patterns commonly observed in equity index options.
- The analysis uses synthetic 10-, 20- and 30-day maturities and periodic delta rebalancing.
- Perpetual swaps are evaluated as hedge instruments because their basis exposure can be smaller than that of dated futures.
- Reported improvements vary by option type, market period and hedge instrument, so they should not be treated as universal.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.