Whether it is hedging volatility, using leveraged exposure for speculation, or earning royalties by selling contracts, investors can use options to give full play to their advantages.
Original title: “Let traders tell you how to play options”
Written by: Ryan Sean Adams
Compilation: Rhythm 0x49
This article is slightly adjusted on the basis of the original text of “DeFi Options Strategies for Traders”. The four DeFi options strategies described in this article are not only applicable to the DeFi market, but also to most markets that provide option derivatives.
Options are a handy tool for experienced investors. They provide diversified risk exposures for different assets in different ways.
Whether it is hedging volatility, using leveraged exposure for speculation, or earning royalties by selling contracts. Investors can use options to give full play to their advantages.
Spread Option Strategy
Generally speaking, spreads are a common way to reduce risk and margin requirements. The following are the four most common option spreads.
Strategy 1: Call Debit Spread (Call Debit Spread)
Bull market call spread, which means that a call option is bought at a specific strike price and the same number of options are sold at a higher strike price. The expiration date and underlying of the two options are the same. The call option spread reduces the cost of the call option, but it also limits the profitability of the strategy.
Trading scenario: If traders believe that the value of an asset will rise to a certain price range, they usually use this strategy. This situation most often occurs during periods of high volatility.
Maximum benefit: The potential profit of a bullish lending spread is limited to the exercise price minus the net cost of the spread. If the stock price reaches or exceeds the strike price of the short subscription at maturity, the maximum profit can be realized.
Maximum loss: If the position is held to expiration, the underlying price is lower than the exercise price of the two call options, and the maximum loss is equal to the purchase price of the two options.
Position details:
Buy a call option, the strike price is higher than the current market, and there is a specific expiration date.
Sell ​​a call option with exactly the same expiration date as the first call option, but with a higher strike price.
Strategy 2: Call Credit Spread in a bear market
A bear market call spread is an option strategy that is achieved by buying call options with a specific strike price and at the same time selling the same number of call options with the same expiration date but a lower strike price. With this strategy, investors should expect the price of the underlying asset to fall.
The main advantage of this strategy is to reduce transaction risks by buying call options with a higher strike price and selling call options with a lower strike price. Under normal circumstances, this strategy is less risky than shorting stocks because there is an upper limit on the maximum loss.
Trading scenario: The trader expects that the price of the target will fall.
Maximum profit: The maximum profit is equal to the premium received when the transaction is initiated, that is, the premium received when the option is sold-the premium spent on the purchase of the option.
Maximum loss: The maximum loss is equivalent to the difference between the two call options-(the premium received by selling the option-the premium spent on buying the option). A bear market bullish spread is seen as a strategy with limited risk and limited return. The limits of profit and loss are determined by the exercise price of a particular call option.
Position details:
Strategy 3: Put Debit Spread in a bear market
A bear market put spread is a kind of put option that buys put options and sells the same amount of the same asset with the same expiration date but with a lower strike price. This strategy seems to be similar to buying ordinary put options, but the difference is that this strategy sacrifices a portion of the potential profit to reduce the cost of buying put options.
Trading scenario: If traders believe that the value of an asset will fall to a certain price range, they usually use this strategy.
Maximum return: the difference between the exercise price of the two options-(the premium received by selling the option-the premium spent on buying the option).
Maximum loss: The premium received by selling the option-the premium spent on buying the option.
Position details:
Strategy 4: Put Credit Spread (Put Credit Spread)
A bull market put spread is a strategy that sells put options with a higher strike price and simultaneously buys the same number of put options with the same expiration date but a lower strike price.
Trading scenario: When traders expect that the price of the underlying asset will rise slowly, they usually use this strategy.
Maximum return: The maximum return occurs when the closing price of the underlying price is higher than the higher exercise price when the option expires.
Maximum loss: The maximum loss is the premium received from selling put options-the premium received from buying put options. The upper limit of profit and loss is determined by the strike price of the specific call option.
Position details:
In the traditional options market, a centralized trading platform is required to provide a trading venue. However, with the rise and application of DeFi, options can now also be traded on decentralized platforms.
Opyn is a DeFi option agreement. They recently released the V2 version. This version of the agreement can propose a more cost-effective solution and new features, providing better trading opportunities for all traders reading this article. The following will discuss Opyn’s new features and some more advanced options strategies.
Introduction to Opyn V2
Opyn V2 is a DeFi option agreement based on the Gamma protocol. Users can buy, sell, and create ERC20 standard options. DeFi users and products can use Opyn’s smart contracts and pages to hedge DeFi risks or a variety of encrypted asset positions.
Currently, Opyn is different from other DeFi option agreements in 7 points:
- Allow more capital efficient option trading strategies, such as spread options (Spread);
- Lightning minting means that option tokens are minted without collateral, as long as they are destroyed before the end of the transaction;
- A more competitive price, because both the bid and the asking price are determined by market supply and demand;
- Allow users to sell and hold options before they expire;
- Real-value options can be automatically exercised;
- If the product is whitelisted, anyone can create a new option product;
- Operator is allowed to perform operations or transactions on behalf of the user.
The Gamma protocol has improved the efficiency of the use of funds in DeFi options transactions mainly in several aspects: improved margin, European options, cash-settled options and flash purchases.
Improvement margin
Starting from spread options, the Gamma agreement provides options with higher capital efficiency. The price difference based on Opyn allows long oTokens to be used to pledge short oTokens, so that the maximum loss of the user structure can be released as collateral.
European options and cash-settled options
European options settled in cash can improve margin by constructing safe spread options.
European options mean that the holder of the option can only exercise the option on the expiry date. Cash settlement means that option holders do not need to provide the underlying assets but directly use mortgage assets to exercise their rights. Option holders will receive cash proceeds (the difference between the exercise price and the price of the underlying asset, in units of the exercise asset) when the option is exercised.
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