Zero-Cost Hedging, particularly relevant in crypto institutional options trading, refers to constructing a derivatives strategy where the cost of buying options is precisely offset by the premium received from selling other options. This approach aims to mitigate risk exposure to an underlying digital asset without incurring a net upfront cost.
Mechanism
Operationally, a zero-cost hedge typically involves a collar strategy: purchasing an out-of-the-money put option to protect against downside risk, and simultaneously selling an out-of-the-money call option to finance the put. The strike prices and expirations are carefully selected so that the premium received from the call sale equals the premium paid for the put purchase. RFQ crypto platforms facilitate pricing and execution of these combined option legs.
Methodology
The strategic objective of zero-cost hedging is capital preservation and downside protection while retaining some upside potential, all without initial cash outflow. This methodology provides a risk management framework for institutional investors holding digital assets, allowing them to define a specific range of potential outcomes. It effectively limits both the maximum loss and the maximum gain, offering a cost-efficient way to manage market volatility.
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