Four rising weeks sold volatility; a -12.86% Friday and 78.4% realised vol force the hedge
Should an options desk that sold ETH volatility during four rising weeks buy back part of its short gamma now, or wait for realised volatility to settle before hedging?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 15 August 2022, ETH fell 16.39%, from 1,935.32 to 1,618.13, after four straight up weeks of 19.35%, 5.03%, 1.32% and 13.83%. Friday 19 August dropped 12.86%, with the largest one-hour fall of -3.75% starting 06:00 UTC, and realised volatility ran at 78.4% annualised against a 32.08% weekly range. Funding averaged 0.0018% per eight hours, so carry was negligible. The close sat in the lower third of the range, 66.61% below the 52-week high. An illustrative options desk sold ETH volatility during the rising weeks and must now decide whether to hedge.
Judgment
Short volatility earns only while realised moves stay below the price that was collected. This week realised 78.4% annualised, delivered a 12.86% day and closed in the lower third of the range, so the sold gamma is the source of the loss rather than a carry trade. Buy back part of the short gamma with out-of-the-strike puts nearest the 1,523.67 low, and delta-hedge through the day instead of at its end, since the worst hour began at 06:00 UTC and the low came late, in the 16:00-23:59 window. Accept the premium paid and the residual open risk; size against the 32.08% range, not the average week.
What would change it
If realised volatility falls below the level the desk sold at for several consecutive weeks and ETH holds above 1,523.67, the protection can be resold. A weekly close back above the 2,012.47 high would suggest the hedge was bought late rather than wrongly.
What sets this case apart
The desk is not forecasting direction; it is deciding how fast to pay to exit short gamma after four rising weeks, with the hedge priced against one day's 12.86% fall.