Sold volatility into a 14.32% range, the desk must choose a hedge after a 6.04% day
Should the desk buy back protection on part of its sold options now, or let the premium keep decaying through a week of 73.4% annualised realised volatility?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 11 March 2024, BTC closed at 68,393.48, down 0.82% from 68,955.88, in the middle third of a 14.32% range that ran from 73,777.0 (Thursday) to 64,533.0 (Sunday). Realised volatility annualised at 73.4%, one hour lost 3.62% on Friday, Saturday fell 6.04% and Sunday gained 4.74%. Volume was 2.21 times the prior 12-week average. An illustrative desk has sold options on BTC and must now decide how much to hedge.
Judgment
The desk collected premium in a week that ended almost where it began, so direction cost little while a 6.04% day and a 3.62% hour show how fast the sold exposure could reprice. Hedge a stated fraction of the delta with short-dated protection rather than the whole book, sized so Friday's hourly move fits inside the desk's loss tolerance. Accept that the protection's cost is paid out of premium already received, and that the position will still lose if volatility continues to compress.
What would change it
If realised volatility falls well below 73.4% annualised for two consecutive weeks and daily moves stay inside roughly 3%, the hedge can be unwound as the cost stops earning its place.
What sets this case apart
The tension is volatility sold into a week that closed flat in the middle of its range, so the exposure runs through price swings rather than through direction.