What protecting $10,000 of ETH for a year costs

In short: You want to put $10,000 into ETH and protect it against a big fall for a year. Buying put options, contracts that pay out if the price falls, at the current price has cost about 30.5% a year on BTC and 40.1% on ETH. That is more than the asset’s own growth, and every price level, budget and length we tested lost. It barely protects either: $8,363 a year of BTC puts cut the worst drop only from 56.2% to 55.0%, so holding a smaller position is the cheaper way to limit the damage.

“Put 10,000 USDC into WETH and protect it against a fall of more than 15% over the next year.”

A real person typed that request, and it is one of the most common things anyone asks for. It is also the one where the honest answer is least welcome.

The short version#

Insuring a long position at the money costs about a third of the position’s value per year on BTC and about two fifths on ETH. The premium is larger than the asset’s own drift, which means no choice of strike and no size of budget rescues it.

What was tested#

We ran a sweep instead of one backtest, because a single configuration that loses is an anecdote, and a single configuration that wins is usually a bug.

Every combination lost. Repricing at the skew a live option chain showed did not change it.

It barely even protects#

This is the part that surprises people who have already accepted the cost. The premium buys much less protection than it looks like it should.

Two ways this measurement goes wrong#

Both of these produced results we had to throw away, and both are easy to reproduce if you go looking for this yourself.

1. Spending 100% of the sleeve on premium is not a hedge

   Set the premium budget to the whole account and every roll spends everything on options. That reads as −96.6%, but what it measures is a leveraged buyer of volatility, not somebody insuring a position. A buying structure is sized by its premium, so the budget is the whole trade.

2. Never judge an option strategy at one placement

   A 365-day put looked like +3.4 points on BTC at a single placement. Its drawdown saving was −0.1, which gave it away: it was a directional bet dressed as a hedge. Laddered across four placements the advantage vanished and it lost in six of eight windows.

What the prices are built on, exactly#

We would rather you knew where the soft part is.

There is one measured input: DVOL, Deribit’s 30-day at-the-money volatility index. Strike is handled by a skew we set, tenor by a term structure we set. Historical option chains are not available from anyone, so this is model-priced and always will be.

One known bias, stated plainly: real volatility is a smile and this model is not, so it prices selling calls too cheaply. That means covered-call results are pessimistic by an amount we have not measured.

So what do you do instead#

Three things, in order.

1. Price it before you assume it is prudent

   “I’ll hedge the downside” sounds responsible and costs a third of the position a year. Nine structures can be priced at once (protective put, collar, put spread, straddle, strangle, covered call and more), today and at every roll since 2021. It takes one question and costs nothing.

2. Size the position instead of insuring it

   If a 55% drawdown is unacceptable, holding less is free. Protection that reduces it to 54% leaves you with the same position plus a fee.

3. Check what the other side pays

   In this data the opposite side worked: selling puts with a regime filter instead of buying them. That is a different risk with a different failure mode. It is not advice, only the direction the measurement points.

The honest summary#

If you came here to find out what a hedge costs, the number is 30 to 40% a year against the asset’s own drift, and it does not improve at any strike or budget we tested.

That answer is more use than a tool that cheerfully builds you the position. Measuring takes one question and no money. Buying the position takes a year and a third of your capital to reach the same conclusion.