How Can an Option Trader Hedge His Forward Risk?
![How Can an Option Trader Hedge His Forward Risk?](/content/images/size/w1200/2024/01/Video-Cover--19-.png)
When you trade Call or Put Options, the underlying asset is the Forward corresponding to the option maturity, not the Spot.
For example, if you trade a 3month expiry Call Option on BTC, you care about the price of Bitcoin 3month forward, which is a function of the spot and the 3month funding / interest rate. Hence, if you want to correctly hedge the delta risk of your option, you need to trade the 3month Bitcoin forward.
Of course, if you hedge via the Spot and the time difference between Spot and Forward is very little, the basis (the difference) between the 2 will be negligible, when markets are quiet. When markets are volatile, these 2 prices can diverge significantly.
Term Structure helps traders stay disciplined and hedge the correct Forward risk of their positions.