Delta Hedging for Digital Asset Options

By:

Cloudwall Research*

August 18, 2023

Delta hedging is a core strategy for managing risk in options markets. This paper compares traditional Black-Scholes delta with Serenity’s smile-adjusted delta, focusing on Bitcoin options.

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Analysis

Delta Hedging for Digital Asset Options

By:

Cloudwall Research*

August 18, 2023

Introduction

Delta hedging is a core strategy for managing risk in options markets. This paper compares traditional Black-Scholes delta with Serenity’s smile-adjusted delta, focusing on Bitcoin options.

Abstract: Delta hedging often plays a central role in managing directional risk for options traders. However, the Black-Scholes model, which is often used to compute option delta and other greeks, involves assumptions that are usually not reflective of real-world market conditions, especially in the highly volatile digital assets market. This paper introduces a smile-adjusted delta as a subtle approach that accounts for the volatility “smile” phenomenon observed in options markets. We follow with an empirical analysis of delta hedging strategies for bitcoin options, focusing on the smile-adjusted delta compared to the traditional Black-Scholes delta.

Download the full research paper to discover which method better manages the complexities of volatility in the crypto space.

*Note: Cloudwall and the technology behind its Serenity System were acquired by Talos in April 2024. Learn more.

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