Sold volatility into an 8.85% best day, the desk must hedge upside it cannot time
Should the desk buy upside protection now that ETH has already risen 7.05% with an 82.5% realised volatility, or leave the short-volatility position open and accept a repeat of Saturday's 8.85% day?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 8 March 2021, ETH rose 7.05%, from 1,726.46 to 1,848.10, with a 16.78% range and 82.5% annualised realised volatility. The best day was Saturday 13 March at +8.85%, and the largest one-hour move was 3.95% that same mid-UTC day. Funding averaged 0.0724% per eight hours and peaked at 0.1552%, and volume ran at 0.91 of the prior twelve-week average. An illustrative options desk has sold volatility and is exposed if price runs further.
Judgment
The desk's exposure is to the upside moves it has already been paid for, and the week supplied an 8.85% day plus a 3.95% hour inside 82.5% realised volatility. Hedge the upside, but only in part: buy enough protection to cap the next large day rather than to restore a neutral position, since volume below the twelve-week average and a close at 65.6% of the range give no evidence of exhaustion. Keep the sold positions open where the funding of 0.0724% per eight hours still compensates.
What would change it
If funding falls towards its weekly minimum of 0.0111%, the carry no longer pays for the remaining upside risk and the hedge should be widened. If price closes below the weekly low of 1,664.96, the upside hedge can be reduced.
What sets this case apart
The decision is about upside gamma on a sold-volatility book in a rising market, not downside protection after a fall.