During the last couple of months we have been contacted by many asset managers/traders and companies holding digital assets, with questions regarding the costs of hedging their positions (mostly in BTC). Given the number of inquiries received, I decided to share in one table what would be the average normalized cost of buying BTC Put Options with 30 DTE and different Moneyness % (OTM Strikes) from Jan 2020 to Jul 2022. As an example, a BTC Put Option 15% OTM 30 DTE, has an average effective cost (premium) of 3.3% (40.1% annualized).
BTC Put Options - Jan 2020/July 2022
| OTM% | DTE | Cost | Annualized |
|---|---|---|---|
| -5% | 30 | 0.068 | 0.8273 |
| -10% | 30 | 0.048 | 0.5840 |
| -15% | 30 | 0.033 | 0.4015 |
| -20% | 30 | 0.0323 | 0.3930 |
| -25% | 30 | 0.016 | 0.1947 |
| -30% | 30 | 0.01 | 0.1338 |
| -35% | 30 | 0.008 | 0.0973 |
| -40% | 30 | 0.005 | 0.0608 |
| -45% | 30 | 0.004 | 0.0487 |
| -50% | 30 | 0.003 | 0.0365 |
| -55% | 30 | 0.002 | 0.0243 |
Is it expensive in relative terms (compared with equities)? Absolutely. Does it make sense? Depends. There've been many times where Put Options have been much more expensive (even ridiculously expensive). The samples below show the annualized average cost of a BTC Put Option 15% OTM 30 DTE during stressful market conditions. During the Covid market crash in March 2020 the cost was above 550% (unreasonable from every angle but we witnessed those prices as we were already trading digital derivatives back then). During the May 2021 crash, the cost reached 271%; and during June 2022, 148% (it's clear how crypto derivatives growth and adoption has resulted in a steady decline in the premiums).
| Timestamp | |
|---|---|
| 2020-03-10 | 0.301590 |
| 2020-03-11 | 0.359824 |
| 2020-03-12 | 0.368822 |
| 2020-03-13 | 5.881191 |
| Timestamp | |
|---|---|
| 2021-05-19 | 1.693148 |
| 2021-05-20 | 2.718507 |
| 2021-05-27 | 1.834327 |
| Timestamp | |
|---|---|
| 2022-06-16 | 0.957295 |
| 2022-06-17 | 1.070667 |
| 2022-06-18 | 1.485550 |
Having said the above, I hope this info is useful for those who contact us and are willing to hedge their digital assets exposure. Needless to say that there are more efficient ways of minimizing these hedging costs through more complex options structures such as Dynamic Collar structures, Diagonal Spreads, etc. We don’t recommend these kinds of structures without having previous experience in trading derivatives on digital assets; collateral and margins are tricky and require a 24/7 dedicated and experienced team.
Anyway, the idea is to synthesize what's been explained during the last couple of weeks/months by the Teks Capital team to institutions holding digital assets (or companies interested in becoming holders of digital assets). Keep in mind that the numbers above were calculated from our own prop data (tick and intraday data, although exchanges got halted during selloffs that might generate some differences with other databases, specially during the early 2020) and we only used 30 DTE; costs would change drastically if we'd use shorter/longer expirations (rollovers, etc.). We used mark prices for the analysis, though, spreads (bid/ask) during selloffs are really wide which’d also affect premiums.