EP41 Three Simple Options Strategies as DeFi Insurance
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TLDR below. This is not financial advice.
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One of the most attractive feature of options is that it can be a combination of options or combined with other derivatives to create a variety of strategies. The possibilities for profit can be so varied that almost any investor can find a strategy that meets their preferred level of risk and is in line with the market forecast.
Without options, the strategies are very limited. If the assets are expected to increase, people would buy the stocks; if they are expected to decrease, people would sell them. Choice makes the move from forecasting to a profitable action plan, if the forecast is correct. Of course, the strategy will punish you for incorrect prediction. However, with the correct use of options, the punishment will be quite small and predictable.
In this newsletter, we will introduce some simple option strategies that you can apply easily. These strategies are the easiest to understand and require the least transaction.
Covered Call Option strategy
TLDR: I have $ETH. I sell options for $ETH so people can buy $ETH when prices increase. I get money upfront. I lose the infinite upside.
Who will use this strategy?
You have people who own the asset, say $ETH. In crypto space, we have two types of people. The first type is people who just have $ETH as an investment and keep it in their wallets. I'm looking at you, institutional investors.
The second type is people who are liquidity providers to protocols like HEGIC, OPYN.
Sell Call Option
For people who are liquidity providers, this is where you will be selling a call option.
Crash course: call option is basically the ability for someone else to buy your ETH. You're selling the possibility for someone to buy this asset (ETH) from you at a different price.
Let's say ETH right now is worth $1800 and you want to sell this call option. The strike price is $1950 and they have to pay a premium of $100. Let's say ETH becomes $2200.
Because someone bought the call option from you, they can go to you and buy at $1950 because you've already made a promise. The benefit for you is that you received this $100 premium no matter what. This premium is why people want to be option sellers as they get to earn some money.
How does this strategy help to manage risk?
This is money upfront whether ETH goes to $2200 or ETH drops to $1000. Whatever happens to ETH doesn't matter because I have this $100 upfront.
What Else Did You Miss?
Married PUT (Options insurance)
Who uses Married PUT?
Bull Call Spread
What do you need
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TLDR: Strategies are presented here to create basic positions from which you can explore other new strategies. As mentioned, options strategies allow the creation of positions with the risk aversion level from the investor's demands. Using the strategy as a hedge, it is necessary to consider whether your position is suitable or not.
Get smarter: Not any asset has options based on it. However, we can design our own to make contracts that closely resembles an asset we hold with another asset. Of course, the complexity and number of transactions also increase, they reduce profit by cost.
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