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
Why Hedge?
Risk Without Hedging
LP Position: $20k in ETH/USDC
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/USDC
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
Core Hedging Strategies
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 USDC
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 Sell Options
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 USDC
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/USDC 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.
Advanced Strategies
Ratio Spread
Unequal number of long and short options:
Example:
Buy 1 ETH $2,000 call for $80
Sell 2 ETH $2,200 calls for $40 each = $80
Net Cost: $0
Payoff:
ETH < $2,000: Lose nothing (zero cost)
ETH = $2,200: Profit $200 on long call
ETH > $2,200: Profit capped, potential losses on excess short calls
Use: Moderate bullish view, want free upside to a point
Calendar Spread
Same strike, different expirations:
Example:
Sell 1 ETH $2,000 call (7 days) for $60
Buy 1 ETH $2,000 call (30 days) for $100
Net Cost: $40
Payoff:
Short-term call expires → Theta profit
Long-term call retains value → Keep upside exposure
Use: Expect short-term stability, long-term move
Butterfly Spread
Three strikes, limited risk and reward:
Example:
Buy 1 ETH $1,900 call: $120
Sell 2 ETH $2,000 calls: $80 × 2 = $160
Buy 1 ETH $2,100 call: $50
Net Cost: $10
Max Profit: At $2,000 at expiration
Max Loss: $10 (net premium)
Use: Expect price to stay near $2,000
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
MegaETH Advantage: Real-time Greeks enable precise rebalancing.
Hedging LP Positions
Understanding IL Risk
Impermanent loss occurs when prices diverge:
Start: 10 ETH + $20,000 USDC at $2,000/ETH
LP Share: $40,000
ETH drops to $1,500:
Pool rebalances: 11.55 ETH + $17,320 USDC
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 USDC)
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. CLM 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
- Pricing Models - Calculate optimal hedge sizing
Protect your portfolio. Trade with confidence.