ETH Collar Hedging is a risk management strategy involving the simultaneous acquisition of a protective put option and the sale of a covered call option on Ether (ETH), alongside a held ETH position. Its purpose is to limit potential losses from a price decline while also capping potential gains from a price increase, within a defined range. This creates a bounded risk profile.
Mechanism
The operational setup requires an existing ETH holding. A put option is purchased to establish a minimum selling price for ETH, protecting against downward movements. Concurrently, a call option with a higher strike price is sold against the ETH holding, generating premium income to offset the put’s cost. This defines the upper limit of the profit range.
Methodology
This strategy adheres to a risk-constrained investment framework, seeking to mitigate tail risk in an ETH position by defining a clear profit and loss corridor. The selection of strike prices and expiration dates for both options is crucial, balancing downside protection against foregone upside potential. This process is often optimized through quantitative analysis of ETH price distribution and volatility.
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