A 20.36% range week tests whether to hedge sold volatility after the move or after the next
Should the desk buy back protection on the volatility it has already sold after BTC realised 85.1% annualised, or keep the short-vol exposure and hedge only the delta it must deliver?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 23 November 2020, BTC fell 1.24% to close 18,184.99, inside the middle third of a 20.36% range: it set a high of 19,484.21 on Wednesday, then a low of 16,188.00 on Thursday, its worst day at -8.38%, with a largest one-hour fall of -4.21%. Realised volatility reached 85.1% annualised on volume 2.11 times its prior 12-week average, after four consecutive up weeks (5.62%, 12.45%, 3.11%, 15.4%). An illustrative options desk has sold BTC volatility and now faces this realised move against its marks.
Judgment
The 20.36% range and 85.1% realised volatility have already passed through the sold options; buying protection now at post-move premiums largely pays for the week that happened. Hedge only the delta the desk must deliver against Thursday's low, using the smallest amount that keeps inventory inside its stated limit, and keep the short-vol position size where a repeat week of the same hourly amplitude (-4.21%) does not force a liquidation. Accept that a further -8.38% day will hurt: the realised move is history, and over-hedging converts a bad week into a certain cost.
What would change it
If BTC prints another single day within 2% of -8.38%, or another one-hour move beyond -4.21%, the desk should buy back a defined share of the short-vol exposure rather than only delta. If funding, positive here at 0.0402% per eight hours, turns negative while realised volatility stays above 85%, re-assume the short-vol size.
What sets this case apart
The decision turns on hedging after a volatility spike has already realised, when protection is dearest, rather than on the direction of BTC.