- The Beginner Friendly Defi Options Guide📈 -
We've seen how decentralised perp trading has taken crypto by storm (GMX, Gains and so on).
Could decentralised options be the next big trend in the real yield narrative?🧐
Let's dive into how options work 🧵 1/18
We've seen how decentralised perp trading has taken crypto by storm (GMX, Gains and so on).
Could decentralised options be the next big trend in the real yield narrative?🧐
Let's dive into how options work 🧵 1/18
2/ The options market is a multi trillion dollar industry and is beginning to enter the defi arena with protocols such as
@lyrafinance
@ribbonfinance
@dopex_io and more.
On @DefiLlama you can go to "Categories" -> "Options" to view all the current protocols.
@lyrafinance
@ribbonfinance
@dopex_io and more.
On @DefiLlama you can go to "Categories" -> "Options" to view all the current protocols.
3/ But options can be complicated😵💫 so let's break down how they work.
I will focus on @lyrafinance in order to explain this. They are operating on Optimism and currently have ETH, BTC & SOL options.
I will focus on @lyrafinance in order to explain this. They are operating on Optimism and currently have ETH, BTC & SOL options.
4/ Options allow a trader to lock in a price to either sell or buy an asset (strike price) in a given time period.
It's a great way to leverage the return on an asset if you're bullish on a certain price direction.
The price of an option is called the "premium" and is volatile.
It's a great way to leverage the return on an asset if you're bullish on a certain price direction.
The price of an option is called the "premium" and is volatile.
5/ There are two categories of options:
1) Calls -> allows the holder to lock in a price to buy an asset
2) Puts -> allows the holder to lock in a price to sell an asset
1) Calls -> allows the holder to lock in a price to buy an asset
2) Puts -> allows the holder to lock in a price to sell an asset
6/ - Calls -
You buy a call option if you think the price of an asset (i.e ETH) is going to increase.
E.g. the price of ETH is $1325 and you buy a $1200 call option. What this means is that you'll be able to buy $ETH at $125 discount.
You buy a call option if you think the price of an asset (i.e ETH) is going to increase.
E.g. the price of ETH is $1325 and you buy a $1200 call option. What this means is that you'll be able to buy $ETH at $125 discount.
7/ This would allow you to, in theory lock in a $125 profit but as the price of the call option (premium) will be > $125 you won't make a profit unless ETH appreciates in price ⬆️. This is illustrated in the picture below.
8/ - Puts -
You buy a put if you think the price of an asset is going to depreciate (decrease).
E.g. the price of ETH is $1325 and you buy a $1500 put option. here you'll be able to sell $ETH at $175 premium.
Again, due to the premium ETH has to ⬇️ in order to profit.
You buy a put if you think the price of an asset is going to depreciate (decrease).
E.g. the price of ETH is $1325 and you buy a $1500 put option. here you'll be able to sell $ETH at $175 premium.
Again, due to the premium ETH has to ⬇️ in order to profit.
9/ More terminology:
An option is in the money if you are able to trade it at a better price:
Calls: If strike price is lower than current asset price: ETH call at $1200 vs real price is $1325
Puts: If strike price is higher vs asset price: ETH call at $1500 vs $1325 real price
An option is in the money if you are able to trade it at a better price:
Calls: If strike price is lower than current asset price: ETH call at $1200 vs real price is $1325
Puts: If strike price is higher vs asset price: ETH call at $1500 vs $1325 real price
10/
An option is out of the money if the option strike price is worse than actual price:
Calls: If strike price is higher than current asset price: ETH call at $1500 vs real price is $1325
Puts: If strike price is lower vs asset price: ETH call at $1200 vs $1325 real price
An option is out of the money if the option strike price is worse than actual price:
Calls: If strike price is higher than current asset price: ETH call at $1500 vs real price is $1325
Puts: If strike price is lower vs asset price: ETH call at $1200 vs $1325 real price
11/ - Price -
The price of options (premium) is determined by:
- The token price relative to the strike price
- The amount of time remaining until expiration of the option (price lowers as expiration comes closer)
- Volatility: How much the asset is expected to move
The price of options (premium) is determined by:
- The token price relative to the strike price
- The amount of time remaining until expiration of the option (price lowers as expiration comes closer)
- Volatility: How much the asset is expected to move
12/ Strategy #1 - Long call
As mentioned a call is bought when price is expected to go up.
Option price: $100
Expiry: Otc 14th
Call: $1400
ETH goes from $1300 to $1700
Profit: $1700-$1400 = $300 (+300% on the initial $100)
If ETH is < $1400 at expiry the loss is $100 (100%).
As mentioned a call is bought when price is expected to go up.
Option price: $100
Expiry: Otc 14th
Call: $1400
ETH goes from $1300 to $1700
Profit: $1700-$1400 = $300 (+300% on the initial $100)
If ETH is < $1400 at expiry the loss is $100 (100%).
13/ Strategy #2 - Long put
When you expect price to decrease.
Option price: $100
Expiry: Otc 14th
Call: $1200
ETH goes from $1300 to $1000⬇️
Profit: $1200-$1000 = $200 (+200% on initial $100)
If ETH > $1200 at expiry the loss is again the $100 (100%).
When you expect price to decrease.
Option price: $100
Expiry: Otc 14th
Call: $1200
ETH goes from $1300 to $1000⬇️
Profit: $1200-$1000 = $200 (+200% on initial $100)
If ETH > $1200 at expiry the loss is again the $100 (100%).
14/ Other strategies such as covered call & cash secured put are a bit more complicated and require collateral against the position.
The loss can therefore be greater here but are generally bought when less volatility is expected. Read more:
docs.lyra.finance
The loss can therefore be greater here but are generally bought when less volatility is expected. Read more:
docs.lyra.finance
15/ - Greek symbols -
You also need to familiarize yourself with the following:
- Delta: The option's price sensitivity to price changes of underlying asset (e.g. ETH)
- Vega: The option’s price sensitivity to changes in the implied volatility of the asset
You also need to familiarize yourself with the following:
- Delta: The option's price sensitivity to price changes of underlying asset (e.g. ETH)
- Vega: The option’s price sensitivity to changes in the implied volatility of the asset
16/
- Gamma: The rate of change of an option's delta
- Theta: Measures how much value an option will lose as a result of the passage of time
All these can have a big impact on the return on options. Read more here: docs.lyra.finance
- Gamma: The rate of change of an option's delta
- Theta: Measures how much value an option will lose as a result of the passage of time
All these can have a big impact on the return on options. Read more here: docs.lyra.finance
17/ As you can hear options are far from easy to understand fully. This is meant as a brief description of the primary concepts so if you want to trade options I highly recommend spending some more time trying to understand these subjects.
18/ Like decentralised perps, options allow for ways to earn real yield in terms of fee generated revenue from traders by being the counterpart liquidity. But that's for another thread.
If you found this thread useful I'd appreciate a ❤️ & retweet of the first post:)
And don't forget to follow for more guides in the future;)
And don't forget to follow for more guides in the future;)
Loading suggestions...