Sold volatility into a 95th-percentile ETH week while funding stayed positive all week
Should the desk hedge its short ETH options against a 23.03% weekly rise now, or keep the position and accept the risk of a further gap higher?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 29 March 2021, ETH rose 23.03%, from 1,687.16 to 2,075.69, a 95th-percentile return across 163 weeks of history, closing in the upper third of its 27.9% range. Realised annualised volatility was 67.9%, yet the largest one-hour move was only 3.12%. Eight-hour funding averaged 0.0798% and peaked at 0.1569%, so leveraged longs were paying heavily to stay long. ETH beat BTC by 18.68 percentage points with loose 0.64 correlation. An illustrative desk has sold ETH volatility and is short the upside move.
Judgment
The desk's short gamma is being carried by a trend, not by chop: the largest one-hour move was 3.12% while price advanced 23.03%, so near-dated premium keeps decaying while the delta exposure follows a market rising to 2,075.69. Hedge by buying back the far upside in listed calls rather than chasing delta with spot or perps, since a long perp hedge pays funding of 0.0798% per eight hours on average, peaking at 0.1569%. Keep the short-dated sold volatility, where realised moves remain small, and accept that the bought calls will lose premium if the rally stalls.
What would change it
If eight-hour funding falls back towards 0.022% and weekly returns turn down as in the -3.52% and -5.4% weeks before this one, the bought upside can be unwound and the sold volatility left unhedged. If a one-hour move exceeds 3.12% repeatedly, the near-dated sold volatility should be covered too.
What sets this case apart
The hedge decision separates two risks that move together in price but not in cause: a quiet intraday tape that pays the seller, and a crowded, funded uptrend that threatens the delta.