Convexity Risk Mitigation

Convexity risk mitigation involves techniques to protect a portfolio against the negative impacts of high Gamma or rapidly changing Delta. Since high convexity can lead to large, unexpected losses during market moves, traders use various strategies to dampen this sensitivity.

This may involve trading a mix of options with different strikes and expirations to balance the overall portfolio convexity. In the context of crypto derivatives, this also involves managing leverage and ensuring sufficient margin is available to cover the cost of frequent rebalancing.

Mitigation strategies are essential for maintaining stability in a portfolio that is heavily exposed to derivative instruments.