Short-vol book versus 97.6% realised volatility and a -9.94% day followed by +4.33%
Should an options desk that sold ETH volatility hedge its gamma into this falling, high-realised-volatility week, or accept the delta exposure and wait for the move to resolve?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 21 May 2018, ETH fell 20.35%, from 716.16 to 570.40, with a 30.99% range, annualised realised volatility of 97.6%, a worst day of -9.94% on Wednesday 23 May and a best day of +4.33% on Thursday 24 May. Volume ran 1.13 times the prior 12-week average. ETH lost 6.42 percentage points against BTC and the ETH/BTC ratio fell 7.46%, though hourly correlation was 0.89. An illustrative desk has sold ETH volatility and must decide whether to hedge.
Judgment
A sold-volatility book loses when realised volatility runs ahead of the volatility priced at sale, and this week delivered 97.6% annualised with a 30.99% range. Hedge the gamma, because a -9.94% day and a +4.33% day inside one week is exactly the alternating sequence a short-gamma position pays for. Do not use the BTC leg as a substitute: the 0.89 hourly correlation coexists with a 7.46% ratio fall, so a BTC hedge would leave the desk short the wrong asset by roughly that gap. Accept that hedging costs carry that cannot be recovered.
What would change it
If ETH/BTC ratio change flattens across two consecutive weeks while hourly correlation stays near 0.89, a BTC-based partial hedge becomes defensible. If realised volatility falls back towards the levels of the prior four weeks, the desk can reduce hedge size.
What sets this case apart
The decision turns on realised volatility versus the volatility already sold, and on a cross-asset hedge that fails on the ratio, not on the level of ETH.