What are the main applications for DeFi Options?

Learn about DeFi Options and their practical use cases!

Use Cases For DeFi Options

💡 In this article, you will learn about:

Options Recap

Options are financial derivatives that give the buyer the right to buy or sell an underlying asset at a specific strike price at a specified date. 

Call options give their holder the right to purchase the underlying asset at the strike price, while put options give the right to sell the underlying asset at the strike price.

A derivative is a financial contract that derives it's value from an underlying asset or group of assets, such as ETH or a liquidity pool.

European options can only be exercised at the expiration date, while American options can be exercised at any time before the expiration date.

A premium is the price paid for an option. The premium is also the profit earned by the seller of an option.

The strike price is the price at which the underlying asset can be purchased or sold at.

Hedging Using DeFi Options

If the price of ETH drops below $1500 during the next month, the put option will give Bob the right to sell his ETH at $1500, which would limit his losses. 

If the price of ETH rises, Bob will still profit from his ETH, having only paid the option premium to protect his assets.

Leverage and Price Speculation With DeFi Options

If ETH then rallies to $1400 in the following days, Bob can profit from his calls, having successfully leveraged his upside exposure with options.

If ETH ends up stagnating or decreasing in price, Bobs losses will be amplified with the premiums paid. That's the risk of using leverage - not only can Bob win more, he can also lose more.

Earning Yield With DeFi Options

Liquidity Pools are used to facilitate trading on decentralized platforms like Premia. In exchange for providing liquidity to the platform, depositors can earn trading fees and option premiums.

Strategy Vaults are automated, pre-packaged investing or trading strategies that execute themselves on a continuous basis. They can be based on a multitude of different strategies, e.g. underwriting options, and the potential profit depends on the specific strategy of a given vault.

Key Takeaways

Hedging is a way to protect your current positions and holdings from risk.

Leverage is a way to amplify your potential upside (and downside).

Earning yield is a way to profit from options without directly trading them. This can be done by depositing assets into liquidity pools or automated strategy vaults.

2.1 Use Cases for DeFi Options

What are the basics of using Long Calls and Short Calls?

Learn about the basics of Long Call Options & Short Call Options!

Call Options Basics

Long and Short Positions

"Going long" or entering a long position means an investor is purchasing an asset or instrument with the expectation of value increasing.

"Going short" or entering a short position means an investor is selling an asset or instrument with the expectation of value decreasing.

What is a Long Call?

Long Calls: If the price of the underlying asset increases above the strike price, the holder can exercise or potentially sell back the option to make a profit. 

Long Calls: If the price of the underlying asset doesn't increase above the strike price, the holder can let the option expire and only lose the cost of the premium.

What is a Short Call?

Short Calls: If the option expires while the underlying asset is below the strike price, the seller of the option will profit from the premiums sold.

Short Calls: If the option expires while the underlying asset is above the strike price, the seller of the option might have to sell the asset at the strike price, ending up at a loss.

Use Cases for Call Options

Speculation: Long call positions can be used to speculate on the future price movements of an underlying asset. For example, if an investor believes that the price of BTC will increase, they can purchase BTC call options without having to own any BTC, potentially making a profit.

Hedging: Call options can theoretically be used to hedge against potential losses in existing short positions. For instance, if an investor holds an underlying short position and is concerned about a potential rise in price, they can purchase call options to cap potential losses in the event of the price increasing.

Yield: Investors can generate income by entering short call positions. As long as the price of the underlying asset does not increase above the strike price, the investor can generate income from the premiums collected.

Strategies: Since they are inherently low-risk and cheap, call options can be used in a multitude of strategies for different purposes. Investors can combine long and short call positions to create complex strategies that aim to maximize profits and minimize losses.

2.2 Call Options Basics

What are the basics of using Long Puts and Short Puts?

Learn about the basics of Long Puts and Short Puts!

Put Options Basics

What is a Long Put?

A long put is like a long call, but instead of anticipating the price of an asset to rise, the trader anticipates the price to fall.

Long Puts: If the price of the underlying asset decreases below the strike price, the holder can exercise or potentially sell back the option to make a profit.

Long Puts: If the price of the underlying asset rises or stagnates, the holder only loses the premiums paid for the options.

What is a Short Put?

A short put is like a short call, but instead of profiting if the underlying asset falls or stagnates in value, a trader profits if the underlying asset rises or stagnates in value.

Use Cases for Put Options

Speculation: Long put positions can be used to speculate on the future price movements of an underlying asset. For example, if an investor believes that the price of ETH will decrease, they can purchase ETH put options without having to own any ETH, potentially making a profit.

Hedging: Put options can be used to hedge against losses in investments. For instance, if an investor owns ETH and is concerned about a decrease in price, they can purchase put options to protect against potential losses.

Yield: Options can be used to generate income by selling put options. As long as the price of the underlying asset does not decrease below the strike price, the investor can generate income from the premiums collected.

Strategies: Put options can be used in a multitude of strategies for different purposes. Investors can combine long and short put positions to create complex strategies that aim to maximize profits and minimize losses.

2.3 Put Options Basics

Learn more about DeFi Options and their practical applications!

DeFi Options in Practice

Speculation

Long call: If the price of ETH increases above the strike price, the investor can exercise the option and make a profit.

Long call: If the price of ETH remains the same or decreases, the investor can choose to let the option expire and only lose the cost of the premium.

Hedging

Hedging: If the price of ETH decreases, the investor can exercise the option and mitigate their losses.

Hedging: If the price of ETH increases, the investor will profit from his holdings, and only lose out on the premium paid for the option.

Yield

Underwriting Call Options: If the price of ETH doesn't increase above the strike price, the investor profits the premiums collected.

Underwriting Call Options: If the price of ETH increases above the strike price, the investor may be obligated to sell the ETH at the lower strike price, resulting in a loss.

Strategies

Call Spread: Limits potential losses while still allowing for potential gains.

Covered Calls: Generates income from premiums collected but limits potential gains if the price of ETH increases significantly.

2.4 DeFi Options in Practice

Test your knowledge gained from the DeFi Options Basics course!

Exam: DeFi Options Basics

2.5 Exam: DeFi Options Basics

Take the next step in your journey of becoming a DeFi options savant with the basics of DeFi options and their practical use cases!

Learn about the basics of DeFi options! What are DeFi Options and what is DeFi Options trading? Calls and Puts, and What DeFi options are used for.

Course overview

2. DeFi Options Basics

2.1 Use Cases for DeFi Options

2.2 Call Options Basics

2.3 Put Options Basics

2.4 DeFi Options in Practice

2.5 Exam: DeFi Options Basics