Digital Asset Options Landscape

The earliest recorded example of options was referred to in a book written in mid fourth century BC by Aristotle, a Greek philosopher, where it was used to own all the olive presses instead paid the owners of olive presses a sum of money each in order to secure the rights but not the obligation to use them at harvest time
Although the term wasn’t used at the time, the Greeks effectively created the first over-the-counter call option with olive presses as the underlying security

2. Options in Modern Age

In 1973, the Chicago Board of Options Exchange (CBOE) began trading. For the first time, options contracts were properly standardized and there was a fair marketplace for them to be traded
At the same time, the Options Clearing Corporation was established for centralized clearing and ensuring the proper fulfillment of contracts. Thus, removing many of the concerns investors still held about contracts not being honored. Over 2,000 years after Thales had created the first call, the trading of options was finally legitimate

3. Applications of Options in Modern Finance

We categorize four types of applications for options:

Hedging — Typically buying a put option to hedge against the adverse price movement of the underlying asset with limited loss (put option premium)
Delta Replacement / Speculation — Typically buying of call option to express view of price increase of the underlying asset with limited downside (call option premium)
Arbitraging — Market making buy inexpensive options and sell expensive options contracts based on their pricing model to capture the price discrepancies between market price of the option vs the model fair price of the option while delta hedging to maintain a market neutral portfolio
Overwriting — Investors sell options with the view that it is likely to expire out-of-the-money to earn the option premium, this is widely used by private bank clients which can involve exotic structured products

4. Opportunities in Digital Asset Options

One of the most important factors impacting option price is the volatility of the underlying asset, alongside with other factors used in option pricing such as underlying price, strike price, interest rate and time to expiration
It is noticeable that digital asset exhibits rich volatility compared to TradFi assets. Comparison of 30 day realized volatility: BTC 68%, ETH 82%, S&P500 23%, Gold 12%, EURUSD 7% vs 10y Treasury at 6%
Digital asset volatility on average trades at 3–4x higher vs equity volatility
Defi Option Vaults (DOV) emerged in mid 2021 offers an innovative and democratized way for users to access digital asset options

5. Options used in Treasury Management

In TradFi, options are widely used as an instrument to harvest volatility from option premiums which can be an alternative source of yield and income for many treasury and asset managers.
Common strategies such call overwriting and put underwriting are available in forms of systematic strategies and ETFs
Total addressable market for Web3, DAO, GameFi treasuries estimated to be USD 10b+ and growing, most are sitting idle and lacks the financial expertise on how to manage those assets
Current treasury management offerings are low single digit APY staking pools, double digital APY non risk controlled DOVs or OTC structures

6. Problem Today in Digital Asset

Given digital asset options is a relative new instrument, liquidity is still relatively thin compared to TradFi. BTCUSD 1 month At-the-money Call option best bid ask spread is 15 bps wide (Deribit) vs S&P500 1 month At-the-money Call option best bid ask spread is 1.5 bps wide (CBOE)
CeFi yield solutions lacks transparencies, expose projects to unwanted counterparty risks and loss of treasury assets (eg. Celsius)
Defi Option Vaults (DOVs) promoted APY vs Actual received APY :
a) Current practice is to annualize a weekly or monthly option premium which seem high (eg. 30–50% APY) but this is the ‘best case scenario’ APY
b) When market moves unfavorably user actual received APY from DOVs can be significantly lower or even at a loss
Lack of Risk Guidance:
a) Each option contract has its own inherit risks, typically it’s not wise to sell the option simply based on the highest projected APY as it often exposes to the highest risks (more likely to expire in-the-money, short gamma risk & etc). Currently there’s no risk guidance on which DOV has higher risks vs others
b) Auto-compound in a weekly put selling strategy have proven to be non-sustainable in TradFi as it exposes user to sharp loss using black swan events, which are more frequently observed in digital asset

7. Introducing DVol

DVol is a Web3 treasury and asset management protocol, offers scalable solutions in generating sustainable and transparent yield from digital asset structured products. We are backed by LongHashX and Protocol Labs
Founded by a team over 40 years of combined derivatives and structuring experience from top tier financial institutions (Morgan Stanley, BNP, Optiver). The team comprised of seasoned portfolio manager, structurers, derivatives traders, quantitative researchers and derivatives sales
We offer our expertise in building a range of best-in-class products that helps to bridge the gap between complicated options structures to easily accessible risk managed yield generation solutions for all participants

8. Our Solutions

We are launching First-of-its-kind Options Aggregator
Offers single point of access over 50+ option vaults to compare standardized risk-adjusted APY, allow users to create an auto-rebalancing portfolio of option vaults in just a few clicks
Coming soon...
Smart Vaults / End-to-end Platform / Liquidity & Hedging Solutions

Register your interest:
Be the first to try our Options Aggregator (ETA Nov 2022)
https://forms.gle/zzMb86V453era8mJA

To learn more visit us at:

#RealYield #DigitalAsset #Web3 #StructuredProducts #Derivatives #Options #TreasuryManagement #DeFi #DOV

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