Bitcoin Options Strategies for Crypto Fund Managers

Deribit has historically been the dominant venue for BTC options liquidity, and its product design makes it practical for institutional style overlay programs. Deribit BTC options are European style and cash settled, with expiry and delivery price typically determined using a 30 minute TWAP of the relevant Deribit index into 08:00 UTC, which is intended to reduce manipulation risk around settlement.  

This article outlines how a BTC fund manager can use options on Deribit to hedge a BTC portfolio or enhance performance, with concrete examples and implementation considerations.

Why BTC options matter for a BTC fund

BTC portfolios exhibit large upside and large downside moves, plus regime shifts in implied volatility. Options allow managers to reshape the distribution of returns rather than simply changing exposure. In practice, options can help with four common objectives.

Drawdown control and crisis protection
Defined risk hedging that does not require forced selling into illiquid moves
Income generation through systematic option overwriting
Opportunistic positioning in volatility and skew when the market prices tail risk inefficiently

Understanding how Deribit options work in practice

Before strategy, it helps to align on contract behavior.

European style exercise and cash settlement
Deribit options are European style, meaning exercise occurs only at expiry and cannot be exercised early. Positions can still be closed before expiry by trading out.  

Expiry timing and settlement methodology
Many Deribit options expiries are set at 08:00 UTC. The delivery price for final PnL is calculated as a 30 minute TWAP of the relevant Deribit Index from 07:30 to 08:00 UTC, using frequent index observations.  

Collateral and margin
Deribit supports margining frameworks including portfolio margin approaches that estimate portfolio losses across multiple price and volatility scenarios and use a worst case scenario for margin requirements. This matters for funds running multi leg structures because offsets can materially change required collateral and liquidation risk.  

Contract unit
Deribit has described that each BTC option contract represents 1 BTC in its market comparisons, which simplifies sizing overlays to BTC notional.  

Hedging strategies for BTC fund managers using Deribit options

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1. Protective put for crash protection

Objective
Limit downside beyond a chosen threshold while keeping full upside.

Mechanics
Buy an out of the money put option against the BTC spot or BTC beta exposure. This creates an explicit insurance premium.

Example
Assume the fund holds 100 BTC. Spot is 100,000. The manager buys 3 month 90,000 strike puts on 100 BTC notional.

If BTC falls to 70,000 at expiry, the intrinsic value of the put is 20,000 per BTC. The portfolio loses 30,000 per BTC on spot, but gains 20,000 per BTC on the puts, materially reducing the drawdown (before premium paid).

If BTC rises to 120,000, the puts expire worthless and the cost is the premium, but the fund retains upside participation.

Practical notes
This is simple, transparent, and easy to explain to allocators, but can be expensive in high implied volatility regimes. Many managers therefore prefer spreads or collars.
2. Put spread to reduce hedging cost

Objective
Reduce premium outlay by financing part of the hedge, while still covering a defined drawdown band.

Mechanics
Buy a put at a higher strike, sell a put at a lower strike in the same expiry. This caps protection below the lower strike but reduces net premium.

Example
Hold 100 BTC at 100,000 spot. Buy 95,000 puts and sell 80,000 puts for the same expiry.

If BTC settles at 85,000, the spread pays 10,000 per BTC (95,000 minus 85,000) because the short 80,000 put is still out of the money.

If BTC settles at 70,000, the spread is capped at 15,000 per BTC (95,000 minus 80,000) because below 80,000 the short put offsets further gains.

Practical notes
For many institutional mandates, defined and budgeted hedging cost is preferable to open ended premium spend. Put spreads are a common compromise.
3. Collar for budget neutral downside protection

Objective
Buy downside protection while selling some upside to reduce or fully fund the premium.

Mechanics
Buy a put and sell a call. The sold call finances the put.

Example
Hold 100 BTC. Spot 100,000. Buy 90,000 puts. Sell 115,000 calls.

If BTC falls to 80,000, the puts provide downside protection below 90,000.

If BTC rallies to 130,000, the fund’s upside is capped above 115,000 because the short calls lose value, offsetting spot gains above the strike.

Practical notes
Collars are often used by managers who have strong views on downside risk but are willing to trade some upside for stability or to meet volatility targets. Allocators typically want very clear governance around when collars are applied and how the cap level is selected.
4. Delta hedging around redemptions or liquidity risk

Objective
Reduce the need to sell spot into stressed markets.

Mechanics
If a manager anticipates potential redemptions or needs to preserve liquidity, options can reduce effective beta without selling BTC.

Example
Hold 100 BTC but want to temporarily reduce downside exposure over the next month. Buy 1 month at the money puts or implement a put spread, then reassess post key risk events. Because Deribit settlement uses a TWAP into 08:00 UTC, managers typically align risk monitoring and roll decisions around those expiry windows.  

Performance enhancement strategies using Deribit options

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1. Covered call overwriting to generate yield

Objective
Monetize implied volatility by selling upside, generating option premium income, at the cost of capped upside.

Mechanics
Sell out of the money calls against a BTC holding.

Example
Hold 100 BTC at 100,000. Sell 1 month 110,000 calls on 100 BTC notional.

If BTC finishes below 110,000, the calls expire worthless and the fund keeps the premium, effectively adding yield.

If BTC finishes above 110,000, the short calls lose value and cap upside above the strike.

Why it works when it works
Overwriting can produce positive carry when implied volatility priced into calls exceeds realized upside volatility over the period. It can underperform during sharp bull runs.
2. Cash secured put writing to buy BTC lower with premium

Objective
Earn premium and potentially accumulate BTC at a lower effective entry price.

Mechanics
Sell out of the money puts while holding sufficient collateral, effectively setting a target entry.

Example
Sell 90,000 strike puts with 1 month expiry.

If BTC stays above 90,000, the premium is kept.

If BTC falls below 90,000, the position incurs losses similar to having bought BTC at the strike, offset by the premium received.

Institutional caveat
This strategy increases downside exposure and must be governed like a risk taking position, not treated as free yield.
3. Volatility and skew positioning

BTC option markets often exhibit skew, where downside puts are priced at higher implied volatility than upside calls, particularly in risk off regimes. Deribit’s own research frequently discusses skew and smile behavior in BTC options.  

Managers can incorporate this into overlay decisions, for example selecting strike levels based on delta and relative implied volatility, or using spreads that sell richer volatility to finance cheaper volatility. These trades require robust risk controls because they can introduce short convexity.

Deribit specific implementation considerations for funds

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1. Settlement mechanics and operational calendar
Because many options expire at 08:00 UTC and settle via a 30 minute TWAP, operational readiness around that window matters for NAV processes, risk reporting, and roll execution.  
2. Margin framework and liquidation risk
Multi leg strategies can behave very differently under portfolio margin than under position by position margining, particularly in stress when correlations change and implied volatility jumps. Deribit describes portfolio margin as scenario based with worst case outcomes driving requirements, and also provides detail on how deltas and shocks are handled.  
3. Collateral choice and basis effects
Deribit has supported coin settled and USDC settled options in parallel, which can create differences in PnL currency, collateral management, and potential basis between markets. For funds that report in USD terms, aligning collateral and PnL currency with NAV conventions can reduce operational friction.  
4. Governance, mandates, and disclosure
For professional fund managers, options overlays must be supported by clear investment guidelines and risk limits. Typical governance items include permitted strategies and instruments maximum notional and Greek exposures counterparty and venue risk policies margin buffers roll frequency and stress testing. This is as important for investor due diligence as it is for internal risk.

How CV5 Capital supports options enabled BTC funds

For BTC managers, the difference between using options occasionally and running a repeatable institutional overlay program is governance and infrastructure. CV5 Capital supports multiple funds and invests heavily in AI driven fund governance solutions that help managers operate these strategies with stronger oversight. That includes AI assisted monitoring of exposures and limit breaches, automated exception reporting, structured board and investment committee packs, and workflow tools that support consistent documentation of hedging rationale and roll decisions across funds. This becomes increasingly valuable when portfolios use multi leg structures, roll frequently around weekly or monthly expiries, and must evidence discipline to institutional allocators.

Important risk note

Options can reduce risk or add risk depending on structure. Selling options introduces potentially large losses in certain scenarios and may create margin stress during volatility spikes. Funds should treat options overlays as governed portfolio policies with robust stress testing, collateral management, and independent oversight, not as an ad hoc trading activity.

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