How to Hedge Your Portfolio in DeFi
Protect your gains without selling your positions
Use Continuum Short tokens to hedge existing portfolio exposure. Maintain upside potential while protecting against downside risk.
Step-by-Step Guide
Identify Your Exposure
Calculate your current portfolio exposure. If you hold SOL, ETH, or traditional stocks in a brokerage, you have directional risk that can be hedged.
Focus on hedging your largest positions first - they represent the most risk.
Mint L/S Tokens for Hedged Asset
Deposit stablecoins to mint L/S tokens for the asset you want to hedge. For hedging stock exposure, mint tokens for SPY or specific stock synthetics.
Consider correlation - SPY hedges broad market risk, individual stocks hedge specific risk.
Keep Only the Short Token
Sell the Long token on a DEX for USDC. Your remaining Short token gains value when the underlying asset drops.
The proceeds from selling Long can offset the hedge cost.
Size Your Hedge Appropriately
Match your Short token value to the exposure you want to hedge. A 50% hedge protects half your downside while keeping half your upside.
Full hedges eliminate upside too - most traders hedge 25-50% of exposure.
Monitor and Adjust
As the underlying moves, your hedge ratio changes. Periodically rebalance by minting more tokens or adjusting position size.
Set calendar reminders to review hedge ratios weekly or monthly.
Risks to Consider
- Opportunity cost if the asset rises significantly
- Cost of the hedge (difference between minting and selling Long)
- Basis risk if synthetic doesn't track perfectly
- Rebalancing costs for maintaining hedge ratio
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