What I watch before I take hedges off
After a big drop, the thing I watch before I unwind hedges is how vol behaves on the next leg down.
Take crypto after a sharp sell-off and a pretty pathetic bounce. I’m still fairly neutral, still very well hedged, and I’m half expecting another test lower.
That second test is where I learn the most.
On the way down, I want to see volatility not responding quite as dramatically the second time around. I want to see skew not catching a massive bid.
If spot gets weaker and vol doesn’t react, that’s when I think you can start talking about a real base forming. Something we can build off, and get long against over a medium-term horizon.
If I see those sorts of things, it makes me more excited about unwinding more hedges and actually getting longer again.
If vol rips again on the retest and skew gets bid hard, the hedges stay on. The market’s still scared, and I’d rather stay protected than guess the bottom.
It’s the same signal I’ve been talking about with bonds and with NVDA. Price is still heavy, but the options market stops panicking about it. That type of vol divergence is just another potential flag that a sell-off is getting exhausted.
Knowing when to take a hedge off is one of the trickier calls in trading, and it’s one of the things I keep as part of my framework. What the vol needs to do first. How to unwind in stages. When to go back to being plain long.
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