Sold volatility into a 19.79% fall and an 8.95% hour, the desk must size a hedge now
Should the options desk hedge its short-volatility book into the week's close, or accept the loss and wait for realised volatility to fall back?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 23 September 2019, BTC fell 19.79% from 10,028.05 to 8,043.82, with a -12.46% day on Tuesday 24 September that contained the week's largest hourly move of -8.95% starting 18:00 UTC. Realised volatility reached 95.5% annualised, the return sat in the 1.0 percentile of 84 weeks of history, and the close finished in the lower third of the week range, 42.38% below the 52-week high. Volume was 0.92 times its prior 12-week average and funding held flat at 0.01% per eight hours. An illustrative desk has sold options against this market.
Judgment
A 95.5% realised vol and an 8.95% hour mean the book's short gamma is being run over, not merely marked down. Hedge the delta and reduce the size of the short-volatility positions rather than adding to them, because the week sits at the 1.0 percentile of 84 weeks and the loss can compound within a single session. Accept that the hedge costs carry and locks in this week's loss; funding flat at 0.01% offers no offset. Do not raise the sold-volatility size to recover premium in a market that closed in the lower third of its range.
What would change it
If realised volatility falls back towards pre-week levels and BTC holds above the week's low of 7,750.00 for several sessions, the hedge can be reduced and sold-volatility size restored under a fixed limit. If BTC recovers above the open of 10,028.05, the case for holding the hedge through the next expiry weakens.
What sets this case apart
The decision is about a short-volatility book already run over by realised volatility, not about the direction of the underlying.