@BanklessHQ recently posted an article talking about crypto options. They mentioned 2 types of options traders but forgot maybe the most important one: The Options Writer 🗞
So let’s dive into it 👇
As mentioned in the Bankless article, we find the risk avertoors (hedgers) and degen speculatoors, but we also find the Options writer, or options seller, which in crypto terms could be considered a type of Yield Farmoor.
The seller’s main goal is to generate consistent income by selling weekly OTM (Out of the money) options and collecting a premium by locking in some collateral which in crypto is usually a stablecoin or the underlying asset itself.
Let’s use an example:
Mr. Haines is an Options writer about to sell his weekly option, he sees ETH currently trading at $1535, and after a long and strenuous market analysis, he concluded that ETH will most likely stay inside the $1380-$1740 range until the next Friday.
Haines then heads over to @Synquote app.synquote.com/trade looking for an option outside the prior stipulated range and finds an $1800 call strike which is priced at $6.32 per contract.
He then sells 10 contracts, receiving $63.29 in premiums. Normally, he would need to deposit $18,000 USDC to fully collateralize the position, but with Synquote's new margin mode on Arbitrum (launching soon👀), he can under-collateralize with a minimum of around $3,126 USDC.
Let’s calculate the ROI on both strategies:
Premium / Collateral x 100
Fully collateralized:
$63.29 / 18000 x 100 = 0.35% ROI
Partially collateralized:
$63.29 / $3126 x 100 = 2.02% ROI
Choosing the under-collateralized option comes with the risk of being liquidated due to leverage. To avoid this, Haines must monitor the Account Health Factor and ensure it stays above the maintenance margin requirement of 1.
If after looking at this example you’re left wondering “why would someone lock up a huge capital for a small gain?”, let me try and give you an answer:
A speculator, or buyer, can indeed make way more money with long calls or long puts, but contrary to the seller, he has many factors acting against him and his success:
• Theta decay
• Needs to choose the right strike
• Needs to buy at low IV to avoid IV crush
• Wants increasing IV
• Needs to predict direction and strength
A seller or writer, on the other hand, doesn’t need to predict where ETH will be by expiration, he only needs to predict where it WON’T be (which is definitely easier than the first option).
So as long as ETH is not above $1800 (strike price chosen in the example) Mr. Haines doesn’t really care if ETH is at $100 or $1700 by the expiration date.
So option sellers, if not greedy, can have a very high win rate (over 90% in some cases) which for some is definitely a better strategy than to try and speculate.
In TradFi sellers used to be big institutional traders, like Warren Buffett and Michael Burry, but these past few years more and more retailers have started adopting these strategies (Covered Calls and Cash Secured Puts)
medium.datadriveninvestor.com/how-warren-buffett-made-7-5-million-in-under-5-minutes-79363ac2d52b
steadycompounding.com/options/how-warren-buffett-uses-options/
There you have it, folks. The options writer might not be the flashiest trader, but he sure knows how to make a consistent income.
And with crypto options becoming more and more popular, we might just hear more and more the narrative of selling options, both for institutions, protocols, and also for retailers like myself.
If you’re interested in learning more about Crypto options and becoming an Options Writer yourself, I’ve got just the thing for you. Check out my course on Crypto Options to learn how to find and sell these weekly options to make a consistent income:
udemy.com/course/crypto-options-101-how-to-make-passive-income
Thanks for reading about the current state of crypto options and the roles of different users in the ecosystem.
I’m gonna leave the link to the original BanklessHQ article down below.
Cheers!
newsletter.banklesshq.com/p/getting-to-know-your-options