The crypto world is evolving at a dizzying pace, opening up new possibilities for traders. Among these possibilities is options trading, a traditional financial strategy that has found a place in the digital asset market. However, the question arises, "Is the best crypto options platform actually an options platform at all?"
In this article, we delve into crypto options trading and shed light on an innovative protocol that may alter the way you think about this matter.
As a trading strategy, buying or selling options can potentially yield substantial profits, and in the TradFi world, options trading (particularly buying puts) is an often used way to manage portfolio risk.
Options desks work by allowing traders to speculate on the future value of a cryptocurrency, giving contract purchasers the right to buy (known as a call) or sell (known as a put) at a pre-agreed ‘strike price’ on a particular expiry date.
When the contract ends, there are two possible outcomes - the contract expires ‘in the money’ or it expires ‘out of the money’.
For a call, a contract is deemed out of the money when the contact ends and the price is below the strike price. For puts, the contract is out of the money if the price is above the strike.
In the money is the reverse of the above, and this is where the option buyer makes their profit, and the seller, well they take the loss this time. In the case an option expires in-the-money, the buyer has the right (but not the obligation) to purchase or sell 100 units of the asset at the strike price. This is called “exercising your option”, but the contract buyer may also choose not to exercise their option, and instead take a cash settlement, which is the difference between the strike price and the current price.
So, for example, a user buys a Put option with a strike price of $1000. The asset bombs to $900 and the contract expires in-the-money.
The contract buyer can now decide to sell 100 units of the asset at the $1000 strike price (assuming they own 100 units of the asset) or they can simply take the difference as a cash settlement - either way, they net a profit of $10,000 less the premium they paid.
The premium is paid to the seller of the contract, and on most options desks, the seller gets to set the premium they will charge. This is where there is a lot of opacity surrounding options premiums, as the buyer doesn’t know whether this represents a fair price.
There is a standard method for calculating a ‘fair’ price on options desks known as the Black-Scholes formula, which was developed in the 1970’s. This mathematical model attempts to discover what the actual value of an option is based on implied volatility, and in doing so, it makes a number of assumptions. Black Scholes has been criticised by some top investors in the past, and even its own creators recognised the limitations of their model in highly volatile markets - and there are few more volatile that crypto, when it really gets going.
Over the last few years, a number of Crypto-based options trading platforms have sprung up, offering an appealing financial strategy for generally more sophisticated traders.
However, crypto options trading platforms are generally differentiated from their TradFi equivalents in the form of settlement. For example, the biggest platforms, such as Deribit, offer only cash settlement options, and generally a limited number of tracked assets.
Despite this, the crypto options trading platforms do attract a significant number of users, although nothing like the volume of trades compared to their TradFi counterparts.
Despite its attractiveness, crypto options trading comes with its own set of challenges. Firstly, it's inherently complex. Mastering the nuances of options contracts, strike prices, and expiry dates demands a comprehensive understanding of financial markets. This complexity can deter many, particularly newcomers to the crypto arena.
Furthermore, the top-tier crypto options platforms may not be universally accessible due to regulatory restrictions, thereby excluding a number of potential users.
The cost associated with crypto options trading is another major downside. Procuring options contracts can be a costly affair, especially in volatile markets, which can erode potential profits and make it less efficient than other investment strategies.
Whilst the maximum loss that can be incurred by a contract buyer is the price of the premium, sellers can have theoretically unlimited losses, especially if they are selling calls on an asset that spikes massively to the upside.
For example, during the huge crash which occurred in the 2022 bear market, many put options sellers lost their entire annual yields in the space of a few days as FTX imploded and the crypto market went into free-fall.
This is where Bumper, an innovative DeFi protocol, steps in. Offering a simpler, more accessible, and economical alternative to traditional crypto options trading, Bumper allows you to shield your crypto assets - your actual assets that is - from market downturns while still enabling you to benefit from potential market upswings.
And that’s not all - Bumper allows those on the other side of the market to earn a yield by assuming some of the risk from those ‘bumpering’ their assets by providing pooled liquidity (akin to options sellers), and it achieves this in a much fairer and efficient manner than options desks.
Had those same sellers who ended up getting 'rekt' in the 2022 bear market been earning on the Bumper platform during the same period, well their losses would have been significantly lower, according to Bumper’s extensive economic simulations.
Bumper is exceptionally user-friendly. You simply establish the price at which you wish to protect your asset and set a term length. In the event of a market crash, your asset's value will not sink below this price. And if the market surges, your asset’s value can still climb. This eradicates the complexities associated with traditional options contracts and strike prices.
As a decentralised protocol, Bumper isn't bound by the same regulatory limitations that conventional crypto options platforms face, making it accessible to users globally.
When considering cost-efficiency, Bumper outperforms traditional crypto options platforms. It offers a safety net for your crypto investments without the substantial expense or complexity associated with options contracts.
To conclude, while crypto options trading has its merits, it's worth exploring alternatives. Bumper, with its simplicity, accessibility, and cost-effectiveness, makes a strong case for being the best crypto options platform, even if it doesn't strictly fall within the conventional definition of an options platform.
Bumper launches on the Ethereum network in August 2023.
EDIT: Bumper's planned August launch has been postponed until September 7 2023.
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