Hedging Strategies
Protect your portfolio from adverse price movements using options-based hedging strategies. Learn how to hedge liquidity positions, token holdings, and manage overall portfolio risk.
At a Glance
- Hedge LP positions against impermanent loss
- Protect token holdings from downside
- Generate income while maintaining protection
- Combine multiple strategies for complex risk profiles
- Pool-based execution with instant settlement
- Real-time hedge effectiveness tracking
- Strategies organized by market sentiment
Why Hedge?
Risk Without Hedging
LP Position: $20k in ETH/USDm
ETH drops 30%: $2,000 → $1,400
Impermanent Loss: -$1,800
LP Fees Earned: +$200
Net Loss: -$1,600
Unhedged portfolio suffers full IL
Risk With Hedging
LP Position: $20k in ETH/USDm
Hedge: Buy 5 ETH puts at $1,800 for $250
ETH drops 30%: $2,000 → $1,400
Impermanent Loss: -$1,800
LP Fees Earned: +$200
Put Option Profit: ($1,800 - $1,400) × 5 = +$2,000
Hedge Cost: -$250
Net: +$150
Hedged portfolio protected and profitable
Strategies by Sentiment
Bullish Strategies
Strategies for when you expect prices to rise.
Call
Description: High profits if the price rises sharply.
Use Case: Bullish outlook, expect significant upward price movement.
Setup:
Buy: 10 ETH $2,200 calls (30 days)
Premium: $80 per ETH = $800 total
Execution:
1. Select ETH Call strategy
2. Enter 10 ETH amount
3. Select 30-day duration
4. Review premium: $800
5. Approve USDm
6. Purchase option
7. Receive option NFT
Payoff:
ETH at $1,800:
- Call expires worthless: -$800
- Net loss: -$800 (premium paid)
ETH at $2,200:
- Call at break-even: $0
- Net: -$800 (premium cost)
ETH at $2,500:
- Call profit: ($2,500 - $2,200) × 10 = +$3,000
- Premium cost: -$800
- Net gain: +$2,200
When to Use:
- Strong bullish conviction
- Expect significant price increase
- Willing to pay premium for leveraged upside
Strap
Description: High profits if the price rises sharply, reasonable profits if the price falls.
Use Case: Expect high volatility with bullish bias.
The Strap is similar to the Straddle in terms of betting on rising volatility. The Strap usually consists of two call options and one put option with the same strike price and the same expiration.
You can think of the Strap as a bullish Straddle: "I don't care what the price will be, but if it changes significantly in either direction during the period of holding Strap, I win. And I win even more if the increase in volatility leads to an increase in the price of the asset."
Structure:
Buy: 2 calls + 1 put at same strike
Example: 2 ETH $2,000 calls + 1 ETH $2,000 put
The Strap has a limited cost and unlimited potential profit.
Buying one Strap is equal to buying three ATM options at the same time: two ATM calls and one ATM put.
Payoff:
Price rises: 2x call exposure, high profits
Price falls: 1x put exposure, moderate profits
Price stays flat: Loss premium (time decay)
When to Use:
- Expect volatility with upward bias
- Want asymmetric upside exposure
- Accept higher premium cost
Bull Call Spread
Description: Low cost, decent profits if the price rises to a certain level.
Use Case: Moderately bullish, want to limit cost.
Structure:
Buy: 1 ETH $2,000 call for $80
Sell: 1 ETH $2,200 call for $40
Net Cost: $40
Payoff:
ETH < $2,000: Lose $40 (net premium)
ETH = $2,200: Max profit $200 - $40 = $160
ETH > $2,200: Profit capped at $160
When to Use:
- Moderately bullish
- Want lower cost than straight call
- Accept capped upside
Bull Put Spread
Description: Low cost, decent profits if the price stays at a certain level or rises.
Use Case: Neutral to bullish, want to collect premium.
Structure:
Sell: 1 ETH $1,800 put for $50
Buy: 1 ETH $1,700 put for $20
Net Credit: $30
Payoff:
ETH > $1,800: Keep $30 credit (max profit)
ETH = $1,800: Keep $30 credit
ETH < $1,700: Max loss $100 - $30 = $70
When to Use:
- Neutral to bullish
- Want to collect premium
- Accept limited downside risk
Bearish Strategies
Strategies for when you expect prices to fall.
Put
Description: High profits if the price falls sharply.
Use Case: Bearish outlook, expect significant downward price movement.
Setup:
Buy: 10 ETH $1,800 puts (30 days)
Premium: $50 per ETH = $500 total
Execution:
1. Select ETH Put strategy
2. Enter 10 ETH amount
3. Select 30-day duration
4. Review premium: $500
5. Approve USDm
6. Purchase option
7. Receive option NFT
Payoff:
ETH at $2,200:
- Put expires worthless: -$500
- Net loss: -$500 (premium paid)
ETH at $1,800:
- Put at break-even: $0
- Net: -$500 (premium cost)
ETH at $1,500:
- Put profit: ($1,800 - $1,500) × 10 = +$3,000
- Premium cost: -$500
- Net gain: +$2,500
When to Use:
- Strong bearish conviction
- Expect significant price decrease
- Want to protect holdings or profit from decline
Strip
Description: High profits if the price falls sharply, reasonable profits if the price rises.
Use Case: Expect high volatility with bearish bias.
The Strip is similar to Straddle and Strap in terms of betting on rising volatility. The Strip usually consists of one call option and two put options with the same strike price and the same expiration.
You can think of the Strip as a bearish Straddle: "I don't care what the price will be, but if it changes significantly in either direction during the period of holding Strip, I win. And I win even more if the increase in volatility leads to a drop in the price of the asset."
Structure:
Buy: 2 puts + 1 call at same strike
Example: 2 ETH $2,000 puts + 1 ETH $2,000 call
The Strip has a limited cost and unlimited potential profit.
Buying one Strip is equal to buying three ATM options: two ATM puts and one ATM call.
Payoff:
Price falls: 2x put exposure, high profits
Price rises: 1x call exposure, moderate profits
Price stays flat: Loss premium (time decay)
When to Use:
- Expect volatility with downward bias
- Want asymmetric downside exposure
- Accept higher premium cost
Bear Put Spread
Description: Low cost, decent profits if the price falls to a certain level.
Use Case: Moderately bearish, want to limit cost.
Structure:
Buy: 1 ETH $1,800 put for $50
Sell: 1 ETH $1,700 put for $20
Net Cost: $30
Payoff:
ETH > $1,800: Lose $30 (net premium)
ETH = $1,700: Max profit $100 - $30 = $70
ETH < $1,700: Profit capped at $70
When to Use:
- Moderately bearish
- Want lower cost than straight put
- Accept capped downside profit
Bear Call Spread
Description: Low cost, decent profits if the price stays at a certain level or falls.
Use Case: Neutral to bearish, want to collect premium.
Structure:
Sell: 1 ETH $2,200 call for $40
Buy: 1 ETH $2,300 call for $20
Net Credit: $20
Payoff:
ETH < $2,200: Keep $20 credit (max profit)
ETH = $2,200: Keep $20 credit
ETH > $2,300: Max loss $100 - $20 = $80
When to Use:
- Neutral to bearish
- Want to collect premium
- Accept limited upside risk
High Volatility Strategies
Strategies for when you expect significant price movement in either direction.
Straddle
Description: High profits if the price rises or falls sharply during the period of holding.
Use Case: Expect large price movement, direction unknown.
Structure:
Buy: 1 ETH $2,000 call for $80
Buy: 1 ETH $2,000 put for $50
Net Cost: $130
Payoff:
ETH at $2,000: Lose $130 (both expire worthless)
ETH at $1,700: Put profit $300 - $130 = $170
ETH at $2,300: Call profit $300 - $130 = $170
When to Use:
- Expect high volatility
- Direction uncertain
- Willing to pay premium for protection both ways
Strangle
Description: Low cost, very high profits if the price rises or falls significantly.
Use Case: Expect large price movement, want lower cost than straddle.
Structure:
Buy: 1 ETH $2,200 call for $40
Buy: 1 ETH $1,800 put for $30
Net Cost: $70
Payoff:
ETH between $1,800-$2,200: Lose $70 (both expire worthless)
ETH at $1,500: Put profit $300 - $70 = $230
ETH at $2,500: Call profit $300 - $70 = $230
When to Use:
- Expect high volatility
- Want cheaper alternative to straddle
- Accept need for larger move to profit
Low Volatility Strategies
Strategies for when you expect prices to stay relatively stable.
Long Butterfly
Description: Low cost, high profits if the price is about a strike price.
Use Case: Expect price to stay near current level.
The Long Butterfly is a strategy that helps you to make a bet on low volatility: that the price of an asset won't rise or fall significantly in either direction during the period of holding.
Instead of being bullish or bearish about the future price, you can have the following reasoning when buying it: "I don't care what the price will be, but if it doesn't change significantly from current levels in either direction during the period of holding the Long Butterfly, I win."
The Long Butterfly is an optimal strategy when the price doesn't rise or fall during the period of holding. The profit zone for this strategy is the opposite of a Straddle: you make profits when the price doesn't change, and you lose when there is volatility with regards to the market price at the moment of buying the Long Butterfly.
With the Long Butterfly, you have higher premiums received for ATM options you sell in comparison to the total amount of premiums for OTM options you sell when you buy the Long Condor.
Structure:
Buy: 1 ETH $1,900 call for $120
Sell: 2 ETH $2,000 calls for $80 each = $160
Buy: 1 ETH $2,100 call for $50
Net Cost: $10
Buying one Long Butterfly is equal to selling ATM Call and ATM Put and at the same time buy OTM Call and OTM Put (two ranges available - Narrow and Wide).
Long Butterfly is an inversion strategy. This means that the strategy includes selling (writing) of options, so they can't be exercised before expiry.
Payoff:
ETH at $2,000: Max profit $100 - $10 = $90
ETH < $1,900 or > $2,100: Max loss $10
When to Use:
- Expect low volatility
- Price expected to stay near strike
- Want defined risk and reward
Long Condor
Description: Decent profits if the price changes slightly.
Use Case: Expect price to stay within a range.
The Long Condor is a strategy that helps you to make a bet on low volatility: that the price of an asset won't rise or fall significantly in either direction during the period of holding.
Instead of being bullish or bearish about the future price, you can have the following reasoning when buying it: "I don't care what the price will be, but if it won't change significantly from current levels in either direction during the period of holding the Long Condor, I win."
The Long Condor is an optimal strategy when the price is moving within the ~10% range. The profit zone for this strategy is the opposite of a Strangle: you make profits when the price moves within the 10% range, you lose money if the price moves up or down from the 10% range.
Structure:
Buy: 1 ETH $1,900 call for $120
Sell: 1 ETH $2,000 call for $80
Sell: 1 ETH $2,100 call for $50
Buy: 1 ETH $2,200 call for $30
Net Cost: $20
Buying one Long Condor is equal to selling OTM Call and OTM Put and buying higher OTM Call and lower OTM Put (two ranges available - Narrow and Wide).
Long Condor is an inversion strategy. This means that the strategy includes selling (writing) of options, so they can't be exercised before expiry.
Payoff:
ETH between $2,000-$2,100: Max profit $100 - $20 = $80
ETH < $1,900 or > $2,200: Max loss $20
When to Use:
- Expect low volatility
- Price expected to stay in range
- Want wider profit zone than butterfly
Core Hedging Applications
Protective Put
Buy put options to protect holdings:
Use Case: Hold tokens long-term but want downside protection.
Setup:
Hold: 10 ETH at $2,000
Buy: 10 ETH $1,800 puts (30 days)
Premium: $50 per ETH = $500 total
Execution:
1. Select ETH Put strategy
2. Enter 10 ETH amount
3. Select 30-day duration
4. Review premium: $500
5. Approve USDm
6. Purchase option
7. Receive option NFT
Payoff:
ETH at $1,500:
- Holding loss: -$5,000
- Put profit: ($1,800 - $1,500) × 10 = +$3,000
- Premium cost: -$500
- Net loss: -$2,500 (50% protected)
ETH at $2,500:
- Holding gain: +$5,000
- Put expires worthless: -$500
- Net gain: +$4,500
When to Use:
- Uncertain short-term outlook
- Want to hold through volatility
- Can afford protection cost (2.5% in this example)
Covered Call
Sell call options against holdings for income:
Use Case: Generate yield on holdings you're willing to sell at higher price.
Setup:
Hold: 10 ETH at $2,000
Sell: 10 ETH $2,200 calls (30 days)
Premium: $80 per ETH = $800 total
Execution:
1. Navigate to Portfolio -> Options Positions
2. Select ETH Call strategy
3. Enter 10 ETH amount
4. Duration: 30 days
5. Deposit 10 ETH as collateral
6. Review premium: $800
7. Confirm sale
8. Receive $800 USDm
Payoff:
ETH at $1,800:
- Holding loss: -$2,000
- Call premium: +$800
- Net loss: -$1,200 (income cushioned fall)
ETH at $2,100:
- Holding gain: +$1,000
- Call premium: +$800
- Net gain: +$1,800
ETH at $2,500:
- Holding gain: +$5,000
- Call exercised: Pay ($2,500 - $2,200) × 10 = -$3,000
- Premium received: +$800
- Net gain: +$2,800 (capped upside)
When to Use:
- Neutral to moderately bullish outlook
- Want additional income on holdings
- Comfortable selling at strike price
Collar
Combine protective put and covered call:
Use Case: Zero-cost or low-cost protection by offsetting put cost with call income.
Setup:
Hold: 10 ETH at $2,000
Buy: 10 ETH $1,800 puts for $50/ETH = $500
Sell: 10 ETH $2,200 calls for $80/ETH = $800
Net Credit: $300 ($800 - $500)
Execution:
1. Buy puts (as protective put above)
2. Sell calls (as covered call above)
3. Net premium received: $300
Payoff:
ETH at $1,500:
- Holding loss: -$5,000
- Put profit: +$3,000
- Call expires: $0
- Net premium: +$300
- Total: -$1,700 (downside capped)
ETH at $2,100:
- Holding gain: +$1,000
- Put expires: $0
- Call expires: $0
- Net premium: +$300
- Total: +$1,300
ETH at $2,500:
- Holding gain: +$5,000
- Put expires: $0
- Call exercised: -$3,000
- Net premium: +$300
- Total: +$2,300 (upside capped)
Benefit: Protected downside ($1,800 floor), capped upside ($2,200 ceiling), plus $300 income.
LP Position Hedging
Protect liquidity provider positions:
Use Case: Hedge impermanent loss in DEX pools.
Setup:
LP Position: $20k in ETH/USDm pool (10 ETH worth)
Risk: IL if ETH price moves significantly
Hedge Options:
Option A - Protective Puts:
Buy 10 ETH $1,800 puts for $500
Protects against downside IL
Option B - Straddle:
Buy straddle at $2,000 for $1,000
Protects against IL from moves in either direction
Option C - Strangle:
Buy $1,800 put + $2,200 call for $600
Cheaper, requires larger move
Execution (Straddle):
1. Select ETH Straddle strategy
2. Enter 5 ETH amount (half of LP exposure)
3. Duration: 14 days
4. Review premium
5. Purchase straddle NFT
Payoff (Straddle at $2,000):
ETH stays at $2,000:
- IL: Minimal
- LP fees: +$200
- Straddle loss: -$1,000
- Net: -$800 (cost of insurance)
ETH moves to $1,500:
- IL: -$1,800
- LP fees: +$200
- Put profit: ($2,000 - $1,500) × 5 = +$2,500
- Straddle cost: -$1,000
- Net: -$100 (nearly break-even)
ETH moves to $2,500:
- IL: -$1,800
- LP fees: +$200
- Call profit: ($2,500 - $2,000) × 5 = +$2,500
- Straddle cost: -$1,000
- Net: -$100 (nearly break-even)
Result: IL largely offset by option gains during large price moves.
Hedging Calculations
Hedge Ratio
Determine optimal hedge size:
Delta Hedging:
Portfolio: 10 ETH ($20,000)
Target: Fully hedged (delta-neutral)
Put delta: -0.4
Required puts: 10 / 0.4 = 25 contracts
Result: 25 put options hedge 10 ETH position
Partial Hedging:
Portfolio: 10 ETH
Target: 50% hedged
Required puts: (10 × 0.5) / 0.4 = 12.5 contracts
Round to: 13 contracts
Result: Protects half of position
Cost-Benefit Analysis
Evaluate hedge effectiveness:
Position: 10 ETH at $2,000 = $20,000
Hedge: Buy 10 puts at $1,800 for $500
Hedge Cost: $500 / $20,000 = 2.5% of position
Protection: From $2,000 to $1,800 = $200/ETH
Unprotected: $1,800 to $0 = $1,800/ETH
Analysis:
- Spend 2.5% to protect 10% ($200 of $2,000)
- Below $1,800, still exposed
- If held 30 days, costs 30% annualized
Decision: Worth it if 10%+ drop likely
Rolling Hedges
Extend protection continuously:
Strategy:
Week 1: Buy 7-day puts for $30
Week 2: Old puts expire, buy new 7-day puts for $30
Week 3: Repeat
Cost: $30/week = ~$120/month
Benefit: Continuous protection
vs One-Time: 30-day puts cost $50 upfront
Execution:
1. Set calendar reminder before expiry
2. Check position still needs hedging
3. Purchase new options with same parameters
4. Maintain continuous protection layer
Dynamic Hedging
Adjusting to Market Conditions
High Volatility Environment:
Premiums expensive → Options cost more
Strategy: Use collars (offset costs)
Or: Buy further OTM options (cheaper)
Or: Accept less protection
Low Volatility Environment:
Premiums cheap → Good buying opportunity
Strategy: Buy more protection
Or: Longer duration options
Or: Tighter strike spreads
Rebalancing Hedges
Maintain desired protection level:
Example:
Initial:
- Portfolio: 10 ETH at $2,000
- Hedge: 10 puts at $1,800 (delta -0.4)
- Net delta: +6 ETH
After ETH drops to $1,900:
- Portfolio: 10 ETH at $1,900
- Put delta increases to -0.6
- Net delta: +4 ETH
Action: Sell some puts or buy calls to rebalance
Hedging LP Positions
Understanding IL Risk
Impermanent loss occurs when prices diverge:
Start: 10 ETH + $20,000 USDm at $2,000/ETH
LP Share: $40,000
ETH drops to $1,500:
Pool rebalances: 11.55 ETH + $17,320 USDm
LP Value: $34,640
vs HODLing: 10 ETH ($15,000) + $20,000 = $35,000
IL: $360
If more volatile swing: IL increases
Hedge Strategy for LPs
Full Protection:
LP Position: $40k (10 ETH + $20k USDm)
Hedge: Buy 5 ETH straddle at $2,000
Cost: $500
Protection: Both upward and downward IL
Partial Protection:
LP Position: $40k
Hedge: Buy 5 ETH $1,800 puts
Cost: $250
Protection: Downside IL only
Bet: Upside IL offset by LP fees
Income Strategy:
LP Position: $40k
Hedge: Sell 5 ETH $2,200 calls
Income: $400
Risk: Upside IL less protected
Benefit: Reduce hedge costs
Execution on MegaFi
Pool-Based Advantages
Instant Execution:
Traditional Options: Submit order, wait for fill
MegaFi: Calculate premium, approve, purchase (<10ms)
Benefit: No execution risk, instant protection
Transparent Pricing:
Premium calculation on-chain
Chainlink price feeds
No bid-ask spread
What you see is what you pay
NFT Transferability:
Hedge no longer needed?
Transfer/sell option NFT
Recover some premium cost
Risk Considerations
Hedge Costs
Hedging isn't free:
Cost of Protection:
- Premiums paid reduce returns
- Need asset to move enough to justify cost
- Time decay works against long options
Example:
Pay $500 to protect $20,000 (2.5%)
Need 2.5% adverse move just to break even on hedge
Over-Hedging
Too much protection hurts returns:
Portfolio: 10 ETH
Hedge: 10 puts (fully hedged)
Result:
ETH rises: Miss most of upside (paid premium)
ETH falls: Protected, but expensive insurance
Better: 50% hedged for balanced approach
Timing
Hedge effectiveness depends on timing:
Buy puts before crash: Effective protection
Buy puts after crash: Late, expensive, less useful
Strategy: Maintain continuous rolling hedges
FAQ
How much should I hedge?
Depends on risk tolerance. Conservative: 75-100%. Moderate: 50%. Aggressive: 25% or less.
Are hedges worth the cost?
If the move happens, yes. It's insurance - you hope you don't need it, but glad when you have it.
Can I adjust hedges after purchase?
Yes. Options are NFTs and can be sold. Add or remove positions as conditions change.
Should I hedge LP positions?
If IL risk concerns you, yes. Hedging makes LP positions more attractive by capping downside.
How do I know if my hedge is working?
Monitor portfolio P&L including hedge positions. Effective hedge reduces volatility of total P&L.
Can hedges be automated?
Currently manual. Auto-Pools integration may enable automated hedging strategies in future.
What if I can't afford to hedge?
Use cheaper strategies: OTM options, collars (premium offset), or accept some risk unhedged.
Next Steps
Apply hedging strategies:
- Options Trading - Execute hedge trades
- Risk Management - Understand risk controls
Protect your portfolio. Trade with confidence.