Case Study: Hedging potential Bitcoin price risk with Micro Cryptocurrency options

Assume the price of bitcoin is currently $36,190.  As Micro Bitcoin futures are 1/10^th the size of one bitcoin, the notional value of one Micro Bitcoin futures price would be $3,619.  This represents approximately 36% of the trader’s bitcoin exposure.  The trader is looking at purchasing the 36,000 put.  If the put option finishes in-the-money, that would give the trader the right to sell the Micro Bitcoin futures at $36,000. 

As the number of options needed to hedge one futures contract is determined by the option delta, assume the theoretical delta of the option is -.46 or a -46 delta.  The trader purchases two 36,000 puts to hedge their exposure to a potential downside price move in bitcoin. The total delta of the position is -92.  This is the delta upon the initiation of the trade but will change as time, volatility and price of the underlying changes. In theory, this represents 92% of one futures contract ($3,619) or the equivalent of approximately $3,330.  This partial hedge protects about 36% of the trader’s physical position if the price of bitcoin drops dramatically.

The theoretical premium of one put is 1,965.60.  The trader purchases two put options for a total of 3,931.20 (2 x 1,965.60). With the .10 contract multiplier, this equates to $393.12.  Assume, volatility is currently at 60% and there are 21 days until the option expiration.   

Volatility: 60%

Theoretical Delta: -92 (-.46 x 2)