Strategy 03 · Derivatives
Options and Volatility
Asymmetry, priced.
An option is the right, not the obligation, to buy or sell at a set price. That asymmetry is what makes it useful: it can protect a position against a fall while leaving the upside intact, or be sold to collect a premium in exchange for taking on that protection. Every option position is, in effect, a position on how much the underlying will move.
Asymmetric hedging
A put option protects a spot or yield position against a fall below its strike, for a premium paid up front. Unlike a futures hedge, it does not give up the upside, and it cannot be liquidated. It is used where the book wants to keep participation in a rally, a venture-adjacent liquid position, for instance, but cannot tolerate a drawdown beyond a defined level. The premium is a known cost; the futures hedge’s cost is unknown in advance.
Volatility carry
Implied volatility (what options cost) tends to trade above realized volatility (what the market actually does) most of the time. Selling options and hedging the directional exposure earns that gap while markets behave. It is a strategy that pays steadily and loses sharply, and it is sized on the size of the sharp loss, not the steady payment.
Structures
Combinations of options define exactly what is being bought or sold: a spread caps both cost and payoff; a collar funds downside protection by selling upside above a level the book is willing to give up; a straddle or strangle is a pure position on movement in either direction. Wesvel uses defined-risk structures by default, so the maximum loss is known at inception.
Venue and settlement
Crypto options trade on a small number of centralized venues and a growing set of on-chain protocols. Centralized venues concentrate counterparty risk but offer depth and cross-margining; on-chain venues remove the counterparty but add smart-contract risk and thinner liquidity. Settlement is usually in the underlying asset or a stablecoin against an index, and index construction is part of venue diligence.
Practice
How Wesvel approaches it
- 01Defined-risk structures are the default; undefined-risk short option positions are held only within the volatility book’s explicit limit.
- 02Hedging premium is budgeted per position against the yield or return it protects, and structures are chosen to fit the budget.
- 03Options exposure is held on venues that have passed diligence, with margin requirements modeled under a volatility shock rather than at current levels.
- 04Greeks (exposure to price, volatility and time) are aggregated across the whole book daily and held within limits.
More in Derivatives
- Hedging Spot ExposureUsing short futures to neutralize unwanted price exposure on positions held for yield.
- Basis and CarryCapturing the premium of dated futures over spot as it converges at expiry, and the funding equivalent in perpetuals.
- Relative ValueTrading differences in funding, basis and term structure across venues, assets and expiries with limited net direction.