How to hedge Bitcoin with options

Why hedge instead of selling

Selling is the simplest way to remove downside risk, and sometimes it is the right answer. Hedging is preferable when you want to keep the position for a reason selling would defeat — you still believe in the long-term thesis, you would trigger a taxable event, or you want to hold through a specific event without being forced out by a temporary drawdown.

A hedge converts an unbounded, unpredictable risk into a known, budgeted cost. That is the entire proposition, and it is worth stating plainly: hedging reduces your expected return in exchange for reducing variance. Insurance costs money. A hedging programme that appears free is usually one that has sold away the upside that would have paid for it.

The protective put

The most direct hedge. You hold BTC and buy a put, which gives you the right to sell at the strike. Below that strike your losses stop, because whatever the spot price does, you can still sell at the strike. Above it you keep all the upside, minus the premium you paid.

If BTC trades at $100,000 and you buy a $90,000 put expiring in three months, you have capped your downside at roughly 10% plus the premium, for that period. If BTC finishes at $70,000 the put covers the difference; if it finishes at $130,000 the put expires worthless and you keep the gain less the premium.

The trade-off sits in the strike. A put close to the current price protects almost immediately but is expensive. A put far below it is cheap but only helps in a severe decline. The useful question is not which is better but how much of a fall you are genuinely willing to absorb before protection begins.

The collar: protection funded by capped upside

If the premium is unattractive, a collar reduces or eliminates it. You buy the protective put and simultaneously sell a call above the current price. The premium collected from the call offsets the cost of the put, and with strikes chosen carefully the structure can cost close to nothing.

The trade-off is explicit rather than free: you have sold your upside above the call strike. Holding BTC at $100,000 with a $90,000 put and a $120,000 call means you are protected below $90,000 and capped above $120,000. Between the two you are unaffected.

Collars suit holders who want to survive a specific period intact and are comfortable giving up an exceptional rally in exchange. They suit conviction holders expecting a large move much less well.

The put spread: cheaper, partial protection

Buy a put at one strike and sell another further below it. This cuts the cost substantially, because the sold put finances part of the purchase, but protection now covers only the band between the two strikes.

A $90,000 put financed by selling an $70,000 put protects the fall from $90,000 down to $70,000. Below $70,000 you are exposed again. This is a reasonable choice when you consider a moderate correction likely and a total collapse unlikely, and it is a poor choice if the scenario you actually fear is the collapse.

Choosing strike and expiry

• Start from the drawdown you can genuinely tolerate, and set the strike there. Working backwards from what the premium costs leads to buying protection that never activates.
• Match expiry to the risk window. If the concern is a specific event, cover it with a margin of a few weeks rather than expiring the day after.
• Longer expiries cost more in absolute terms but less per day, and they avoid repeatedly paying transaction costs to roll.
• Check implied volatility before buying. Hedging after a crash, when volatility has already spiked, means paying the most for protection at the moment it is most expensive.
• Size the hedge to the exposure you want covered, not to the whole position. Partial hedges are frequently the more sensible answer.

Common mistakes

• Buying protection only after a fall has begun, when volatility and therefore premiums have already risen sharply.
• Choosing a strike so far out of the money that it only pays in a scenario that would be catastrophic anyway.
• Letting a hedge expire unnoticed during the period it was meant to cover.
• Hedging continuously without accounting for the cumulative cost, which can quietly exceed the drawdown being insured against.
• Selling a covered call so close to spot that ordinary upside is capped for a small premium.

Doing it onchain

Hedging on a centralised venue means depositing the asset you are trying to protect into someone else's custody, which introduces a second risk while addressing the first. Trading the hedge onchain avoids that: you keep custody, and collateral is margined and settled by the protocol.

Execution quality matters more for hedges than for directional trades, because a hedge is a cost you pay rather than a bet you expect to win, so every basis point of spread is a permanent reduction in the protection you get per dollar spent. Rocket's per-block auction matching means orders fill at their limit price or better with no latency advantage, and because options makers cannot be sniped on stale quotes they can quote tighter. On a multi-leg structure like a collar, where you cross the spread twice, that difference compounds.