Now that the other guy is done with his Perps Trading talk… Let the Options Trading guy take over.

Perps Trading is a lucrative way to multiply your crypto through leverage - however, it may come across as an extremely high risk affair as you may lose all your capital in one fell swoop due to the volatility of the crypto market.

In this series, we explore:

On-chain options trading is emerging as an innovative way for seasoned investors in the crypto space to diversify their portfolios and capitalize on market volatility. As we delve into the depths of this promising financial tool, our experienced options trader's perspective will guide you through its complex yet intriguing intricacies.

On-Chain Options Trading Demystified

On-chain options trading, much like its traditional counterpart, is an advanced trading strategy that enables investors to speculate on the price movement of cryptocurrencies without actual ownership of the asset. The twist? This dynamic financial instrument operates on a blockchain, injecting a layer of decentralization that eliminates the need for intermediaries and promises unprecedented transparency and security.

Despite being a relatively new concept, on-chain options trading has been steadily gaining traction. As with traditional options, on-chain options give investors the right, but not the obligation, to buy or sell a specific amount of a cryptocurrency at a predetermined price (the 'strike price') before a set date (the 'expiration date').

Where on-chain options truly shine, however, is in their decentralization. As all transactions are recorded on the blockchain, this leads to greater transparency and, consequently, increased trust among market participants.

Distinguishing On-Chain Options from Traditional Options

While the fundamental principles of traditional options and on-chain options remain similar, the latter takes advantage of blockchain technology to solve many of the inefficiencies and challenges plaguing traditional options markets. Key distinguishing features include:

Decentralization: In contrast to traditional options, on-chain options are built on blockchain technology. This removes the need for intermediaries, enabling peer-to-peer transactions. Afraid of the tax-man coming for you? Don't say we taught you.

Transparency: Blockchain's immutable ledger provides a transparent record of all transactions, fostering trust among market participants. Have you ever seen a bank's ledger though? We can tell you that… we haven't seen it as well, that's the point.

Efficiency: Through smart contracts, on-chain options trading automates contract execution, eliminating the potential for human error and reducing the time and costs associated with trade settlement.

Global Accessibility: On-chain options platforms are generally accessible to anyone with an internet connection and a digital wallet, eliminating geographical boundaries typically encountered in traditional financial markets. Even your grandmother that is residing in your basement can trade options too!

These unique attributes set the stage for a growing number of investors to explore on-chain options trading as a potential addition to their cryptocurrency portfolios.

Exploring On-Chain Options: Calls, Puts, and Expirations

At its core, on-chain options trading revolves around two types of options contracts: call options and put options.

Call options give the holder the right (but not the obligation) to purchase an underlying asset at a predetermined price (the strike price) within a set time period (prior to expiration). Investors might buy a call option if they anticipate the underlying cryptocurrency’s price will rise significantly before the option expires.

Put options, on the other hand, give the holder the right to sell the underlying asset at the strike price before the option expires. This could be a strategic move if the investor expects the asset's price to drop within the option period.

The expiration date of an option is the last day that the options contract is valid. When the contract expires, it no longer has value and ceases to exist. The expiration date for each option is stated in the contract. In the world of on-chain options, the flexibility of choosing an expiration date varies across different platforms.

Understanding Premium Pricing and Implied Volatility

The premium is essentially the cost of the options contract. In a simplified scenario, it's the amount the option buyer pays to the option seller. This premium can fluctuate based on two major factors: intrinsic value and time value.

The intrinsic value is the difference between the underlying asset's current price and the strike price. The time value, on the other hand, relates to the remaining time until the option's expiration - the longer the duration, the higher the premium, due to increased risk.

A critical component that impacts premium pricing is implied volatility. Implied volatility (IV) refers to the market's prediction of a likely movement in a cryptocurrency's price. In simple terms, higher implied volatility indicates that larger price swings are expected, while lower implied volatility suggests less anticipated price movement.

When implied volatility is high, premiums generally rise and vice versa.

While the above-mentioned factors apply to traditional options trading, on-chain options involve additional considerations such as gas fees, which can influence the overall cost of the transaction. Thus, understanding the complexities of premium pricing is essential for successful on-chain options trading.

Advantages and Risks of On-Chain Options Trading

On-chain options trading brings a host of advantages that traditional options trading can't offer, but it's not without its risks. Let's delve into both sides to give you a balanced perspective.

Advantages

Decentralization: One of the major advantages of on-chain options is decentralization. By conducting transactions on the blockchain, you remove the need for intermediaries or centralized entities. This change can result in a more efficient, transparent, and secure trading process.

Accessibility: On-chain options trading operates on a global scale, 24/7, offering a level of accessibility that traditional markets can't match. This flexibility allows traders from all over the world to participate at any time, regardless of geographical location or time zone.

Customization: Unlike traditional options, which typically have standardized terms set by an exchange, some on-chain options protocols allow traders to customize their options contracts. Additionally, you can even buy 'mini-contracts - fancy a 0.1 contract on a cash-secured put in Ethereum? Only on-chain!

This flexibility can include setting the expiration date, strike price, and more, enabling you to tailor your strategy to your specific risk-reward preferences.

Risks

Despite the advantages, it's critical to understand the potential risks involved in on-chain options trading.

Smart Contract Risk: On-chain options rely on smart contracts, self-executing contracts with the terms of the agreement directly written into lines of code. While this automates and simplifies the process, it can also introduce risks if the smart contract has vulnerabilities or bugs.

Liquidity Risk: Liquidity is crucial in options trading, as it affects your ability to enter and exit positions. Some on-chain options markets may not have sufficient liquidity, leading to wider bid-ask spreads and potentially making it more difficult to close a position at a favorable price.

Market Risk: The cryptocurrency market is known for its high volatility, which can significantly impact the profitability of options trading. Large price swings can cause substantial losses, particularly for inexperienced traders.

The Future of On-Chain Options Trading: Premia Finance, Lyra Finance, and Aevo

On-chain options trading is a rapidly growing field with various protocols such as Premia Finance, Lyra Finance, and Aevo (part of Ribbon Finance) offering unique platforms for this innovative trading method. Each of these protocols has its unique features, providing a diverse range of opportunities for traders. We will delve into each of these protocols in subsequent articles, offering in-depth insights into their functionalities and potential benefits.

Conclusion: Embracing On-Chain Options Trading

To conclude, on-chain options trading represents a new frontier in the crypto space. It's a novel and innovative way for seasoned investors to diversify their portfolios and potentially reap significant returns. While it's not without its challenges and risks, with a thorough understanding and careful approach, it could prove to be a game-changer in the world of cryptocurrency investments.

In our forthcoming series of articles, we will delve deeper into the specific protocols that are pioneering the way in on-chain options trading, including Premia Finance, Lyra Finance, and Aevo. We believe these deep dives will equip you with the knowledge and insights you need to navigate this exciting new terrain.