Convexity Management

Convexity management refers to the practice of controlling the non-linear relationship between an asset's price and the value of a portfolio. In the context of options, this is largely driven by Gamma and Vanna.

A portfolio with positive convexity benefits from larger price moves, as the Delta increases in the direction of the move, while negative convexity can lead to losses during significant price shifts. Managing this involves carefully selecting the strike prices and expiration dates of options to create a desired risk profile.

For market makers, negative convexity is often an inherent part of their business model, as they sell options to collect premiums. They must therefore employ active hedging strategies to offset this exposure.

In crypto, where price action is often characterized by sudden, large moves, convexity management is a critical skill for avoiding ruin. It involves a deep understanding of the Greeks and the ability to anticipate how the portfolio's risk profile will change under different market scenarios.