Crypto Options Trading – Best Decentralized Exchanges
In this Crypto Options Trading article we’ll discuss some of the best decentralized crypto option exchanges available today.
We’ll also briefly cover the concepts behind options as they pertain to crypto.
What is an Option?
An option gives the owner of the option the choice (“option”) to buy or sell the underlying asset at a given price (strike price) on or before a given time (expiration).
Options are commonly used to hedge against a position. They are also used to speculate because you need far less capital to expose yourself to a larger position.
The main difference with owning an option as opposed to a leveraged future is that options work on the concept of an all or nothing premium, rather than an ever fluctuating funding rate.
You pay a premium for the option. If the option doesn’t end “in the money” by its expiration date, there is no sense in exercising the option. You lose the premium. So the amount you spent on the option goes away (aka the price of the option goes to 0).
This idea of the premium is why many people sell options as well, to earn money off the premiums from unexercised options.
Example of a Crypto Option
Dan pays $32 for the option to buy ETH at $1500 in 4 days. The current price of ETH is $1400.
Dan needs ETH to rise to $1532 within the next 4 days to break even. If ETH is below $1500, Dan’s option is worthless. So he is out $32. If ETH goes on a tear and rises to $1750. Dan made $218. (1750-1500 – 32)
So a low cost of $32 can expose you to large price movements, but can also be “out of the money” and worthless quite easily.
Note, with American Options, Dan can also sell his option before the expiration date in the open market.
3 Important Metrics With Options
What is an Option Strike Price?
The Strike Price is the price at which the underlying security can be bought (call option) or sold (put option).
If you own a call option you are hoping that the strike price of the option is below the current market price at expiration. That way you have the right to buy the underlying assset at the lower strike price and sell it immediately on the market for a profit.
If you own a put option you are hoping that the strike price is lower than the market because you have the right to sell the underlying asset at the higher price and buy it on the market at the lower price to automatically close your position.
(Usually, an in the money option is automatically exercised and makes these buys and sells upon expiration, depositing the difference in your account.)
Further Reading: Best Decentralized Derivatives Exchange (Crypto Perpetuals)
What is an Option Expiration Date?
The expiration date is when the option is exercised. So basically, you are betting on the price of the underlying asset at the time and date of the expiration. Once the option is exercised your P/L for a call option = (Current Price – Strike Price – Premium).
For a put option (the right to sell) your P/L = (Strike Price – Current Price – Premium)
What is Implied Volatility in Crypto Options Trading?
Implied volatility is how much the market thinks the price of the underlying asset will change between now and the expiration date. It does not give a direction (up or down). Usually, the higher the implied volatility, the higher the premium for the option.
Usually that means that if implied volatility goes up after a trade is made, that is good for the option buyer and bad for the option seller.
Best Decentralized Derivatives Exchange – Crypto Options Trading
There are centralized exchanges (even some that don’t require KYC like Huobi) that offer crypto options trading. Though, options trading isn’t as readily available in crypto as it is in Tradefi.
However, there are a number of decentralized options for options (ha!) coming to fruition. Here are my favorite.
Related Articles: Dydx Exchange – How To Trade Crypto Perpetuals
Lyra is an options protocol built on Optimism and is my favorite decentralized options trading platform.
I primarily like it because the UI is straightforward and so are the products. A lot of other platforms on this list try to create structured options products to provide yields or certain other strategies. That can be nice, but sometimes you simply want to buy or sell a call or put option on your own.
Lyra allows you to easily buy and sell options through a decentralized AMM at various strike prices and expirations. They have a simple to understand UI, and some helpful graphs, indicators and education for beginners.
You buy the options using sUSD, a stablecoin based around the synthetix protocol.
Also, because Lyra runs on Optimism, gas fees are quite low.
Opyn used to be a pure options trading platform, with premiums etc, but now it seems they’ve pivoted to putting most of their focus on managed positions, primarily Squeeth.
Squeeth is an erc20 token, crypto derivative developed by the Opyn team. Under the hood it uses options strategies and perpetuals to create a token that tracks the price of ETH^2. There’s a bit too much to cover here, and it isn’t a pure option but it basically means you are leveraged long ETH.
Opyn also offers a few managed option strategies for crab markets, bull markets (coming soon), and bear markets (coming soon).
You can find more info about Opyn and Squeeth on their website.
Ribbon is another structured and managed product that uses options and derivatives to give users a yield. Primarily they user covered call options strategies that earn users a yield by collecting premiums.
Friktion is the options exchange of choice if you are using Solana for crypto options trading. The platform also focuses primarily on providing a yield through covered call options. However, you can also buy standard put and call options as well.
Dopex, which stands for Decentralized Options Exchange, runs on Arbitrum, BSC, Avalanche and Metis. This platform focuses a lot on users earning a yield by providing liquidity for options, however you can also buy call and put options as well.
Hegic sells call and put options for BTC and ETH on avalanche and ETH mainnet. They also have some built in spread strategies for crypto options trading that you can execute.
Crypto Options Trading Conclusion
With the rise of decentralized options platforms, crypto options traders are getting more and more options to speculate or hedge their positions. Crypto options trading can be risky, so be careful. But you can also use options to hedge risk from other positions.
For now, good luck and thanks for reading this decentralized options exchange review.