Power-Up Your DeFi Portfolio: 5 Key DeFi Options Strategies You Should Know
Options trading, a cornerstone in the traditional finance world, has been adopted and transformed by the burgeoning world of decentralized finance. Their strategic application can offer sophisticated risk management, income generation, and speculative profit opportunities, all while taking advantage of the unique qualities that DeFi offers. Let’s dive in!
Understanding DeFi Options
Options in the DeFi context retain their basic principles from traditional finance: they offer the right, but not the obligation, to buy or sell an asset at a specific price before a certain date. Yet, what sets DeFi options apart is the open, permissionless, and trustless nature of their architecture. This democratization of financial services removes intermediaries, increases transparency, and creates opportunities for financial inclusion and innovation. If you want to deal with crypto options — DeFi Options are the best option :)
Let’s take a look at 5 basic DeFi options strategies you can use today.
Strategy #1: Protective Puts
Protective puts (also known as ‘Maried put’) serve as an insurance policy for your DeFi portfolio. Consider a scenario where you’re holding ETH, currently priced at $2000, but you’re concerned that the price might decline over the next month. To protect your investment, you can buy a put option. The put option gives you the right to sell ETH at a pre-determined price, the ‘strike price’, at a future date.
Suppose the strike price is $1900 and you pay a premium of $100 for this option. If, within the option’s duration, the price of ETH falls to $1500, you have the right to sell your ETH at $1900 instead of the current market price, thus limiting your losses. In fact, your net sale price would be $1800 ($1900 strike price minus the $100 premium), which is significantly higher than the current market price of $1500.
This strategy, while it involves a cost (the premium), protects you from severe downside risk. Given the volatility of crypto markets, such protection can be a valuable tool for risk management in your DeFi portfolio.
Strategy #2: Covered Call
If you’re holding ETH that you believe will see only minor price increases or even stay flat, covered calls are a viable way to generate additional income. By selling a call option, you agree to sell the asset at a specific price, and in return, you receive a premium.
Suppose you sell a call option with an ETH strike price of $2100 and receive a premium of $100. If the price of ETH stays below $2100 throughout the duration of the option ontract, the option will not be exercised and you get to keep the premium, providing you with additional income. This strategy allows you to profit from stagnant or mildly bullish markets.
If the price rises above $2100, you will have to sell your ETH at $2100. But, because you received a premium of $100, your effective sale price becomes $2200. In other words, by using the covered call strategy, you can increase your potential profit in a rising market.
Strategy #3: Long Straddle
The Straddle strategy is designed for scenarios where you expect significant price movement in the market, but are uncertain about the direction. In a long straddle, you simultaneously buy a call option and a put option at the same strike price and expiration date.
Let’s assume that ETH is currently priced at $2000. You expect a big move but aren’t sure whether it will go up or down. So, you buy a put and a call option with a strike price of $2000 and pay a premium of $150 for each.
If the price of ETH jumps to $2500, your call option allows you to buy ETH at $2000, giving you a profit of $200 ($500 price difference minus the $300 premiums). If the price drops to $1500, your put option lets you sell ETH at $2000, securing a profit of $200 ($500 price difference minus the $300 premiums). The Straddle strategy lets you profit from volatile markets regardless of the direction of the price movement.
Strategy #4: Protective Collar
A Protective Collar strategy is a defensive strategy used when you want to limit potential losses on your investment without limiting potential gains too much. It involves holding the asset, writing a call option above the current price, and buying a put option below the current price.
Let’s assume you hold ETH currently valued at $2000. You could write a call option with a strike price of $2200, and simultaneously buy a put option with a strike price of $1800. This way, your potential losses (and gains) are capped.
If the price of ETH falls below $1800, you can exercise your put option and sell at $1800, limiting your downside. If the price rises above $2200, the holder of the call option will exercise it, and you’ll have to sell your ETH at $2200, capping your upside. The Collar strategy provides a safety net in volatile markets.
Strategy #5: Long Strangle
The Long Strangle is another strategy used when you expect significant price movement in the market but are unsure of the direction. Like the long Straddle, It also involves buying a call and a put at different strike prices. The Long Strangle offers more flexibility than the Straddle and can be less expensive.
Let’s say ETH is trading at $2000. You buy a put option with a strike price of $1800 and a call option with a strike price of $2200, each with a premium of $100. If the price of ETH drops to $1500, you can exercise your put option and sell your ETH for $1800, netting you a profit of $100 ($300 price difference minus the $200 premiums). Conversely, if the price jumps to $2500, you can exercise your call option and buy ETH at $2200, securing a profit of $100 ($300 price difference minus the $200 premiums). The Long Strangle allows you to take advantage of high volatility while limiting your maximum loss to the total premium paid.
Best Practices When Implementing Options Strategies
It’s important to remember that options strategies aren’t foolproof and can lead to losses. Do your research and understand the mechanics and risks of each strategy. Practice good risk management and don’t invest more than you’re willing to lose.
Conclusion
DeFi has taken the traditional concept of options and transformed it into an innovative tool that any investor can access. Whether you’re looking to protect your investments, generate income, or profit from market volatility, DeFi options strategies offer exciting opportunities. But remember, with great potential returns come potential risks.
Grix: Powering the Future of DeFi Options
Grix is a decentralized options aggregator that is purposefully designed to cater to the growing DeFi Options market. By aggregating multiple DeFi options protocols, Grix allows users to secure the best prices, thereby facilitating a superior trading experience. With a commitment to simplicity, transparency, and efficiency, Grix’s mission is to help onboard the next wave of sophisticated DeFi users.
However, Grix is more than just a platform, it’s a burgeoning community of DeFi enthusiasts, traders, and innovators. By joining the Grix community today, you can be a part of this exciting journey and contribute to the evolution of DeFi options.
You can connect with Grix through the Website, follow the latest updates on Twitter, and join lively discussions on Grix Discord channel. To get an early taste of what Grix has to offer, sign up for the Alpha launch waitlist and become a valued early member. By becoming part of Grix’s vibrant community, you are not just observing the future of DeFi options, but actively shaping it.
Disclaimer
The content provided in this article is intended for informational purposes only. It should not be taken as financial, investment, or any other kind of advice. Investing in cryptocurrencies and other DeFi products involves risk; you should only invest money that you are prepared to lose. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.
