Learn about Volatility Skew in DeFi Options!

Understanding Skew

This is where things get complicated, cadet. In this article, you'll learn about:

💡 Advanced Options Concepts

Introducing Skewness

Volatility Skew can be used to identify under- or overpriced options based on implied volatility.

Skew in Options

Smile: Implied volatility is higher for both deep OTM and deep in-the-money (ITM) options than it is for ATM options.

Skew (or Skewness): Implied volatility is different on one side of the ATM options than the other, typically higher for OTM puts than OTM calls.

Reverse Skew: Implied volatility is higher for OTM calls than for OTM puts.

Importance of Understanding Skew

Factors Influencing Skew

4.1 Understanding Skew

Learn in-depth implications for the Greeks in crypto options.

Learn in-depth implications for the Greeks in crypto options!

Understanding The Greeks

In this article, we delve deeper into the Greeks:

💡 Options Greeks

Delta

Call options: A Delta between 0 and 1 indicates the percentage change in the call option's price for a $1 increase in the underlying

Put options: A Delta between -1 and 0 represents the percentage change for a $1 decrease in the underlying.

Gamma

Gamma: If the underlying asset moves in price, Gamma goes both ways.

Theta

Theta: Constant adversary for option buyers, constant beneficiary for underwriters.

Vega

The Greeks: Massively beneficial to understand in navigating the markets, managing risk, and employing strategies.

Interactions Between The Greeks

Delta and Gamma

Vega and Gamma

Delta, Gamma, and Theta

Vega and Theta

4.2 Understanding The Greeks

Learn about the concept of call-put parity in DeFi options!

Learn about call-put parity in DeFi options!

Call-Put Parity

💡 Understanding call-put parity

What is the Call-Put Parity?

Call-put parity is a principle that helps traders identify profitable price differences between options with identical terms.

Call-Put Parity: An Advanced Explanation

Call-put parity is a fundamental principle, stating that the sum of a long call option and a short put option with the same strike price and expiration date is equivalent to holding the underlying asset, and vice versa.

Applications for Call-put Parity

Call-put Parity is an essential concept specifically for understanding arbitrage opportunities, synthetic positions, and further risk management.

Call-Put Parity in Practice

4.3 Call-Put Parity

Learn about options arbitrage in DeFi options!

Options Arbitrage

💡 Arbitrage Strategies

What is Arbitrage?

1. Capital Requirements: Ensure sufficient capital on both exchanges to purchase the option on one platform and sell it on the other. The capital needed could be substantial as most CEXs offer margin trading, while DEXs typically require 100% collateral.

2. Buying and Selling: Buy the option on Premia and simultaneously sell the same option on the other exchange.

3. Profit Realization: Wait until the option expires, and if everything goes as planned, pocket the difference as profit.

Prerequisites for Arbitrage

Arbitrage opportunities are short-lived, requiring swift action to capitalize on.

Course overview

4. Advanced DeFi Options Concepts

4.1 Understanding Skew

4.2 Understanding The Greeks

4.3 Call-Put Parity

4.4 Options Arbitrage

Exam: Advanced DeFi Options Concepts