Hedging a Short-Term 2-3% Price Decline

Trader’s Initial Long Position Details

The trader already has an open long position worth $250 USDT, which was executed at the price of $7 per APT for 20X Leverage, resulting in an order with the position size of 35.71 APT tokens but speculates the possibility of a small price drop (~2-3%).

• Opens a short position with an order value of $250 at $6.86 (2% lower).

• Short Position Size:

S = 250 / 6.86 = 36.45 APT

• Margin Used

250 / 20 = 12.5 APT

What Happens If Price Drops?

• At 3% Drop ($6.79)

Long PnL = (6.79 − 7) × 35.71 = −7.5 USDT

Short PnL = (6.86 − 6.79) × 36.45 = 2.56 USDT

• At 2% Drop ($6.86)

Long PnL = $-5 USDT

Short PnL = $0 USDT (neutral hedge).

Liquidation Risks

Long Position Liquidation Price = 7 × (1−120) = 6.65

This means the Long position liquidates if the price falls below $6.65.

Short Position Liquidation Price = 6.86 × (1 + 120) = 7.2

This means the short position liquidates if the price rises above $7.2

Decision Point

• This hedge partially offsets losses if the price stabilises at $6.79 - $6.86.

• The trader can close the short position for a small profit.

Key Takeaway

• Hedging helps protect against a small downside move.

• However, if the price rebounds too fast, the short position becomes a liability.