Very basic question. Imagine I have some BTC (which is a bubble but I can't get rid of), and some money on an account which allows me to hedge with CME BTC futures.

The problem is that if bitcoin shoots for the stars, my short position at CME will be closed by margin calls and I'll lose my hedge.

The simplest strategy I have in mind, is to short after certain price (say, 8000) and switch to neutral position on CME if p > 8000 + commission. Is this feasible or do I miss something here?


This is feasible but you should be aware it is also potentially inaccurate and inefficient.

What can happen to you is that $P$ will go above \$8,000, then back below, then back above, many times. Each time it goes above, you close your short at some price $\$8,000 + X$. When you reopen, you will open a new short at $\$8,000 - Y$, so you will have losses $X+Y$ and they get expensive very fast. If you reduce your "bands" for $X$ and $Y$, then you find yourself taking smaller losses, but doing so more frequently.

Note that your scheme bears strong similarities to the process of hedging a short options position. For market makers in the futures options markets, it is possible to sell an option and keep $X$ and $Y$ quite small, realizing a profit (this hedging or replication is a key idea behind Black-Scholes). But that relies on maintaining an entire portfolio of options positions, in order to spread out those hedging costs on lots of contracts.

Incidentally, what you describe was once called program trading and is related to portfolio insurance, which many people think was partially to blame for the 1987 crash:

Portfolio insurance, employing computer algorithms, was designed to limit an investor’s loss from a plunging market, while preserving upside gains in rising markets. It consisted primarily of derivative bets, and often involved using “stock-index futures in a rising market and selling them in a falling market,”

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