Option Convexity

Option convexity refers to the non-linear relationship between the price of an option and the price of the underlying asset. This characteristic is primarily driven by Gamma, which measures the sensitivity of Delta to price changes.

As the underlying price moves, the Delta changes, causing the option price to move at an accelerating rate. Convexity is a desirable property for long option holders because it means gains increase as the price moves in their favor while losses are limited.

Conversely, for short option sellers, convexity represents a significant risk because losses can accelerate rapidly. In crypto markets, where price swings are often extreme, understanding convexity is critical for managing tail risk.

It dictates how a portfolio behaves during sudden market crashes or spikes. Traders must account for convexity when hedging to ensure they are adequately protected against large moves.