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Advanced Portfolio Management

đź’ˇ Mastering Portfolio Management

In this article, you will learn about:

  • Advanced portfolio management
  • Portfolio analysis and stress testing
  • Dynamic hedging
  • Portfolio optimization
  • Further analysis and benchmarking.

Portfolio Management

This article is a preface to further portfolio management content in a future masterclass. Now, let's look at a scenario:

A trader has a crypto options portfolio with positions in Bitcoin. They have constructed a bullish portfolio that will benefit from price increasing.

By evaluating the net Delta, they can assess the overall direction exposure of their portfolio. For instance, if the portfolio’s Delta is positive, it benefits from rising prices in the underlying assets. By also evaluating the portfolio's Vega, the trader can understand the portfolio's sensitivity to volatility changes.

The trader utilizes their trading platform or position builder to view the portfolio Greeks, understanding how different market scenarios affect the portfolio. For instance, a rising Vega value indicates increased sensitivity to volatility, which could be useful information during volatile market periods.

Portfolio Analysis

The trader simulates the impact of a potential change in the crypto market using a risk analysis software. By adjusting the implied volatility levels in the simulation, they can observe how the portfolio’s Greeks and overall value respond to different scenarios.

Stress Testing

The trader simulates a flash crash scenario in the crypto market to assess how the portfolio would perform. By analyzing the changes in the Greeks under this extreme market condition, they can better understand the potential vulnerabilities in their portfolio.

Options Portfolio: Constant evaluation and management is essential to the profitability of a crypto options portfolio.

Management and Hedging in Volatile Markets

When a trader with a diverse crypto options portfolio with positions in Bitcoin spot and options, Ethereum spot and options, and other spot altcoins, they have a lot to manage.

Management Scenario: During the March 2020 market crash, the trader reviews the portfolio’s Vega to assess the impact of increased volatility on the options’ premiums. They decide to sell some options to capitalize on the high premiums, adjusting the portfolio to a more neutral Delta to mitigate further downside risk.

Dynamic Hedging: During a period of high market volatility, the trader continually adjusts the hedging positions by buying and selling the underlying assets to maintain a delta-neutral portfolio, thus minimizing the portfolio’s exposure to price changes in the underlying assets. Though delta hedging can be done manually, in times of high volatility this is mostly done systematically

Analysis and Benchmarking

  • Performance Metrics: The trader evaluates the portfolio’s Sharpe Ratio to assess its risk-adjusted performance, comparing it to historical performance metrics to gauge improvement or deterioration over time. The Sharpe Ratio is a measure used to evaluate the risk-adjusted performance of an investment, calculated as the average return earned in excess of the risk-free rate per unit of volatility or total risk.
  • Benchmarking: The trader compares the portfolio’s performance to the performance of a crypto options index or a benchmark portfolio to gauge its relative performance and identify areas of improvement.

Portfolio Optimization

  • Capital Allocation: The trader reallocates capital to long-term options positions in less volatile cryptocurrencies like Bitcoin to manage risk, while maintaining short-term positions in more volatile assets like Ethereum to capitalize on short-term market movements.
  • Correlation Analysis: The trader analyzes the correlation between Bitcoin and altcoins within the portfolio to optimize diversification, adjusting positions to mitigate the risk of highly correlated assets moving in tandem.

Key Takeaways

In conclusion, this article serves as an introductory discourse on mastering portfolio management, particularly in crypto options.

The complexities entailed in managing a crypto options portfolio, ranging from dynamic hedging to stress testing, are succinctly explored through a scenario-based approach

This article encapsulates the essence of portfolio management while paving the way for a more comprehensive exploration in the subsequent content.

Test Yourself!

What is the significance of evaluating a portfolio's Delta and Vega in the context of a crypto options portfolio?

  • Delta helps in understanding the portfolio's sensitivity to market volatility while Vega indicates the overall direction exposure of the portfolio.

  • Delta indicates the overall direction exposure of the portfolio to the underlying asset's price changes, while Vega helps in understanding the portfolio's sensitivity to market volatility.

  • Delta and Vega are metrics used for comparing the portfolio's performance to a crypto options index or a benchmark portfolio.