CME Group, a leading derivatives marketplace, has launched the options of Ether futures, given that the much-anticipated merge has been pushing demand.
Tim McCourt, the global head of Equity and FX products at CME Group, pointed out:
“As market participants anticipate the upcoming Ethereum Merge, a potentially game-changing update of one of the largest cryptocurrency networks, interest in Ether derivatives is surging.”
Since the merge is slated for September 15, CME Group intends to offer more flexibility with the Ether options. Leon Marshall, the global head of sales at Genesis, stated:
“The launch of the new Ether options contract ahead of the highly anticipated Ethereum Merge provides our clients with greater flexibility to trade and hedge their Ether price risk.”
The merge is anticipated to be the largest software upgrade in the Ethereum ecosystem because it will change the consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS).
Therefore, the new options will complement CME Group’s Ether futures, which have recorded a 43% surge in average daily volume year-over-year.
Rob Strebel, the head of relationship management for DRW, said:
“As ether transitions through the anticipated merge this week, we expect we’ll continue to see strong demand for this Ether options contract.”
Since the Ethereum merge has been awaited with bated breath by the crypto community, the network’s speculative action has skyrocketed, Blockchain.News. The open interest shown in the ETH network highlighted that buying pressure outweighed selling.
On the other hand, a hard-fork mechanism is expected to be deployed within 24 hours after the merge.
The Federal Reserve is raising interest rates at the most aggressive rate in nearly 30 years. With inflation at an all-time high and a looming recession, protecting capital is at the forefront of every investor’s mind.
Cash and government bonds were once safe assets during bear markets, but with inflation running amok and central banks struggling to stabilize bond yield curves, these traditional safe havens are looking shaky.
Options contracts can be a good way to hedge some of your risks, as they give you the right, but not the obligation, to trade an asset in the future at a predetermined price. A call option is the right to buy, and a put option is the right to sell.
There are two styles of options contracts. A trader using American-style options can exercise his or her contract at any point during the lifetime of the contract, whereas European-style options can only be executed only at the expiry date.
If it is not profitable to exercise your put or call option at the date of expiry, you can let it expire and take no action. In this scenario, your cost is limited to the amount of money you paid for the options contract when you bought it.
Multiple trading strategies use options contracts. But in this article, I’d like to share some approachable strategies that allow a certain amount of protection without needing to sell your assets.
Let’s take Bitcoin as the underlying asset. If you buy a put option at a strike price equal to or higher than the current price, it gains value as Bitcoin moves lower.
So, if your Bitcoin is in the red, your options contract will be green. And, if the market trends higher, nullifying your option, then Bitcoin will have appreciated covering some of the cost of the contract.
This strategy is best suited to traders who hold Bitcoin as long-term investments and do not wish to sell. This allows them to avoid a worst-case scenario: cascading liquidations that drag Bitcoin down dramatically. Buying a put is like buying insurance for downside risk.
So, if you suspect a further leg down is on the horizon, you can buy a put option as a type of insurance that pays out should the market move lower. Timing is crucial, especially during a bear market.
For example, if you believe the market will trend lower very quickly in the following days, buying a put may well be worth the initial investment, but if the market moves down slowly. You may not be able to recover the premium you paid to buy the put option. The same principle applies to call options as well.
Another popular use of options contracts is selling call options while holding the underlying asset. You can be paid immediately by selling a call option to another party, giving them the right to buy your Bitcoin should the price increase to or beyond a certain amount.
For example, if you sell a call option agreeing to sell 1 BTC at $30,000, you collect the price of that contract — the premium — right away, which acts as a hedge against the downside. Your only risk would be missing out on any gains beyond the strike price, which would be owned by the buyer of the option.
If Bitcoin doesn’t hit the strike price, then the option expires, and you keep the premium. The main risk with this strategy is that the underlying price of Bitcoin falls in the interim.
The bear market affecting crypto and other capital markets is a time to protect capital, so when the good times return, there will be plenty of opportunities to reallocate. Bitcoin price could whipsaw traders in troubled times. By using the options hedge, you can create a more robust portfolio while still HODLing your Bitcoin stack.
Bitcoin (BTC) bulls have good reason to celebrate the 22% gain in the past week. The price is pushing toward $46,000 and to the surprise of many, the $43,000 level held steady despite the volatility caused by the United States inflation data released on Feb.10.
There have been mixed feelings on the macroeconomic side. For example, retail sales in the Eurozone disappointed on Feb. 4 when the figure showed a 2.0% year-on-year growth versus the 5.1% expectation. while the United States nonfarm payroll abruptly showed a 467,000 jobs increase.
Investors are clearly increasingly concerned about corporate earnings despite the stronger than expected China and U.S. economic growth. In the past few weeks some big names took a hit, including Meta (FB), Delivery Hero (DHER-DE), and Paypal (PYPL).
Today’s 7.5% yearly U.S. consumer price index growth will likely reinforce the Federal Reserve’s expectations of at least two interest rate hikes throughout 2022 and not many investors can seek protection in treasuries because the 5-year Treasury yield currently stands at 1.9%.
Bitcoin is still a risky asset, but its price is discounted
Considering that the S&P 500 is only 5% shy of its all-time high, Bitcoin’s recent strength should not come as a surprise. Curiously, put (sell) option instruments dominate the Feb. 11 options expiry, but bears were caught by surprise after Bitcoin price stabilized above $43,000 this week.
Bitcoin options aggregate open interest for Feb. 11. Source: CoinGlass
A broader view using the call-to-put ratio shows a 14% advantage to Bitcoin bears because the $400 million call (buy) instruments have a smaller open interest versus the $460 million put (sell) options. However, the 0.86 call-to-put indicator is deceptive because most bearish bets will become worthless.
For example, if Bitcoin’s price remains above $44,000 at 8:00 am UTC on Feb. 11, only $55 million worth of those put (sell) options will be available. That effect happens because there is no value in the right to sell Bitcoin at $40,000 if it’s trading above that level.
Bulls are aiming for a $300 million profit
Below are the three most likely scenarios based on the current price action. The number of options contracts available on Feb. 11 for bulls (call) and bear (put) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:
Between $42,000 and $44,000: 4,550 calls vs. 1,750 puts. The net result is $120 million favoring the call (bull) instruments.
Between $44,000 and $46,000: 6,380 calls vs. 860 puts. The net result favors bulls by $250 million.
Between $46,000 and $48,000: 7,860 calls vs. 50 puts. The net result favors the call (bull) instruments by $350 million.
This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.
For instance, a trader could have sold a call option, effectively gaining a negative exposure to Bitcoin above a specific price. But unfortunately, there’s no easy way to estimate this effect.
Bitcoin bulls need a small pump above $46,000 to score a $350 million profit on Feb. 11. On the other hand, bears’ best case scenario requires a 4% price drop from the current $45,600 to reduce their loss to $120 million.
Bitcoin bears currently have no reason to add short positions, considering the recent weak corporate data numbers. Therefore, bulls should continue to display strength by pushing the price to $46,000 or higher during Friday’s options expiry.
A $350 million profit might be just what’s needed for bulls to regain confidence and re-open long leverage futures, causing further upward pressure.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
The Bitcoin (BTC) daily price chart seems to be making a steady recovery pattern, but some concerning indicators are coming from derivatives markets. At the moment, the futures and options markets are showing a lack of confidence from Bitcoin pro traders, but there’s a positive spin to the data.
Bitcoin price at Coinbase, USD. Source: TradingView
The road to $40,000 seems uncomfortably predictable, and cryptocurrency traders usually call it “manipulation” when such price movements happen.
If you #bitcoin around that region, just be careful.
A picture speaks a thousands words and I think mine says it all.
Make it or break it time around the corner for #btc. This weekend is weekly close & monthly close as well so expect volatility and manipulation.#Crypto pic.twitter.com/kPhDKAjupQ
— @Maze (Will never DM 1st or Follow) (@_CryptoMaze_) January 28, 2022
Regardless of the rationale behind Bitcoin’s price recovery, investors should analyze derivatives markets to understand how whales, market makers and arbitrage desks are positioned.
While retail traders’ favorite instrument is the perpetual contract (inverse swaps), pro traders often opt for fixed-calendar futures and options. Although they are more complicated to trade, these derivatives offer more complex strategies.
Liquidations are behind us, but so is the route to $69,000
Data shows that there hasn’t been a relevant futures contract liquidation since Jan. 23. When leverage long (buyers) have their positions terminated, it accelerates the price correction, because derivatives exchanges need to sell those futures at market prices.
Total crypto futures liquidations, USD. Source: Coinglass
Notice how the last “big” forced position termination on longs was $290 million on Jan. 23. This partially explains why Bitcoin’s recovery was relatively tranquil over the past week. Still, the market is nowhere near being out of the water, considering that BTC is currently trading 44% below the $69,000 all-time high.
The Bitcoin futures annualized premium should run between 5% to 12% to compensate traders for “locking in” the money for 2 to 3 months until the contract expiry. Levels below 5% are extremely bearish, while the numbers above 12% indicate bullishness.
The above chart shows that this metric dipped below 5% on Jan. 21 and hasn’t yet shown signs of confidence from pro traders.
So the big question is: Is the glass half full? For example, if Bitcoin breaks the $42,000 resistance, some traders will likely be caught off guard, so there’s additional buying activity because no one wants to be left behind.
Bitcoin futures markets are neutral, but options traders are skeptical
Currently, it’s a bit difficult to discern a direction in the market, but the 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge for upside or downside protection.
If traders fear a Bitcoin price crash, the skew indicator will move above 10%. On the other hand, generalized excitement reflects a negative 10% skew.
As displayed above, we’ve been near 10% for almost a week despite the 18% BTC price recovery since the $33,000 bottom. The options skew data shows that pro traders are still pricing higher odds for a market crash.
Despite the not-so-positive indicator from Bitcoin options, these arbitrage desks and market makers will be forced to reverse bearish positions once the price breaks $42,000. However, considering that the futures premium did not show signs of desperation even as the market crashed 52% from the all-time high, the data provides a constructive view.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Bitcoin (BTC) bulls are probably quite disappointed with how the start of 2022 has shaped up, especially since the cryptocurrency plunged over 20% in the first 25 days of the year. Even more shocking is the fact that the supposed $32,930 bottom on Jan. 21 was the lowest level BTC price had seen in 6 months, while equity markets as measured by the S&P500 reached an all-time high on Jan. 4.
The sell-off in risk markets accelerated after the U.S. Federal Reserve announced its plan to raise interest rates in the coming months, a measure intended to hold back the escalating inflation. For example, Invesco China Technology ETF (CQQQ) traded below $58 on Jan. 22, which was a 20% drop from its peak on Nov. 12.
Regulatory uncertainties continue to weigh on the sector as United States Congressman Patrick McHenry called the “inconsistent treatment and jurisdictional uncertainty” on crypto as a problem. McHenry essentially suggested that Congress should take crypto regulation away from executive agencies and courts.
Bitcoin price recovered, but bulls are still in troubled waters
Bitcoin bulls have little to celebrate after the 12% partial recovery to $38,100 on Jan. 26. First, BTC price is down 35% over the past two months, and more importantly, if Bitcoin trades below $38,000 by the Jan. 28 monthly options expiry bears are set to profit by $350 million.
Bitcoin options aggregate open interest for Jan. 28. Source: Coinglass
At first sight, the $1.52 billion call (buy) options overshadow the $760 million in put options, but the 1.96 call-to-put ratio is deceptive because the recent price drop will likely wipe out most of the bullish bets.
For example, if Bitcoin’s price remains below $38,000 at 8:00 am UTC on Jan. 28, only $72 million worth of those call (buy) options will be available at the expiry. There is no value in the right to buy Bitcoin at $38,000 if BTC is trading below that price.
Bears bag a $315 million profit even with Bitcoin near $39,000
Here are the three most likely scenarios for the $2.3 billion options expiry on Jan. 14. The imbalance favoring each side represents the theoretical profit. In practice, depending on the expiry price, the quantity of call (buy) and put (sell) contracts becoming active varies:
Between $35,000 and $37,000: 660 calls vs. 13,550 puts. The net result is $450 million favoring the put (bear) options.
Between $37,000 and $39,000: 1,300 calls vs. 13,100 puts. The net result is $315 million favoring the put (bear) options.
Between $39,000 and $41,000: 3,710 calls vs. 8,170 puts. The net result favors bears by $180 million.
This crude estimate considers call options being used in bullish bets and put options exclusively in neutral-to-bearish trades. However, this oversimplification disregards more complex investment strategies.
For instance, a trader could have sold a call option, effectively gaining a negative exposure to Bitcoin above a specific price. But unfortunately, there’s no easy way to estimate this effect.
$40,000 is still a stretch
It might seem relatively easy to move Bitcoin price up by 3% and bring the expiry price above $39,000 on Friday’s expiry. However, considering the negative news flow regarding regulation and monetary policy tightening, bulls will likely have a hard time pulling it off.
Therefore, if the current short-term negative sentiment prevails, bears could easily pressure the price down 3% from the current $38,100 down to $36,900 and secure a $450 million profit.
In short, bears completely dominate Jan. 28 monthly options expiry, giving little hope for a $40,000 price recovery in the short-term.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Analysts love to issue price predictions and it seems that 9 out of 10 times they are wrong. For example, how many times did analysts say “we will never see Bitcoin back at X price again,” only to see it plunge well below that level a few months later?
It doesn’t matter how experienced a person is or how connected in the industry. Bitcoin’s (BTC) 55% volatility must be taken seriously and the impact this has on altcoins is usually stronger during capitulation-like movements.
I was undeniably wrong about how much crypto could fall from macro contagion.
I remain bullish on the space as a whole and think it is the most important mega-trend of our times.
I joined CT during 2018 and I will be here with you guys in the coming yrs, bull or bear.
— Zhu Su (@zhusu) January 24, 2022
For those unfamiliar with the case, on Dec. 7, Zhu Su’s Three Arrows Capital acquired $676.4 million worth of Ether (ETH) after its price collapsed 20% over 48 hours. Zhu went as far as saying that he would continue to buy “any panic dump”, despite acknowledging that Ethereum fees were unsuitable for most users.
To understand whether there is still an appetite for bearish bets and how pro traders are positioned, let’s take a look at Bitcoin’s futures and options market data.
Futures traders are unwilling to short
The basis indicator measures the difference between longer-term futures contracts and the current spot market levels. A 5% to 15% annualized premium is expected in healthy markets and this price gap is caused by sellers demanding more money to withhold settlement longer.
On the other hand, a red alert emerges whenever this indicator fades or turns negative, a scenario known as “backwardation.”
Notice how the indicator held the 5% threshold despite the 52% price correction in 75 days. Had pro traders effectively entered bearish positions, the basis rate would have flipped closer to zero or even negative. Thus, data shows a lack of appetite for short positions during this current corrective phase.
Options traders are still in the “fear” zone
To exclude externalities specific to the futures instrument, traders should also analyze the options markets. The 25% delta skew compares similar call (buy) and put (sell) options. The metric will turn positive when fear is prevalent because the protective put options premium is higher than similar risk call options.
The opposite holds when greed is prevalent, causing the 25% delta skew indicator to shift to the negative area.
The 25% skew indicator flipped to the “fear” area as it moved above 10% on Jan. 21. That 17% peak level was last seen in early July 2021, and curiously Bitcoin was trading at $34,000 back then.
This indicator might be interpreted as bearish when also considering that arbitrage desks and market makers are overcharging for downside protection. Still, this metric is backward-looking and usually predicts market bottoms. For example, just two weeks after the skew indicator peaked at 17% on July 5, Bitcoin price bottomed at $29,300.
Correlation with traditional markets is not so relevant
It is worth noting that Bitcoin has been on a downtrend for the past 75 days, and this is before the Federal Reserve’s tightening discourse on Dec. 15. Moreover, the increased correlation with traditional markets does not explain why the S&P 500 index peaked on Jan. 4, while Bitcoin was already down 33% from the $69,000 all-time high.
Considering the lack of bears’ appetite to short BTC below $40,000 and options traders finally capitulating, Bitcoin shows little room for the downside.
Furthermore, Bitcoin futures liquidation over the past week totalled $2.35 billion, which significantly reduced buyers’ leverage. Of course, there are no guarantees that $32,930 was the final bottom, but short sellers will likely wait for a bounce before entering bearish positions.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Bitcoin (BTC) investors seem uncomfortable with adding positions after the most recent 40% correction from the $69,000 all-time high made on Nov. 10. In addition to the prolonged downtrend, remarks from the United States Federal Reserve on Dec. 15 about rising interest rates are also weighing on risk-on assets.
The Fed signaled that it could raise its benchmark rate three times this year and there are plans to increase the pace of its asset purchasing taper.
Consequently, traders are worried that these plans will negatively impact traditional and crypto markets because liquidity will no longer be “easily” available.
Bitcoin price at Coinbase, USD (right) vs. China stock market MSCI index (left)
Cryptoasset regulation in the U.S. has recently been in the spotlight and recently a member of the Securities and Exchange Commission’s Investor Advisory Committee called for the agency to open public comments regarding digital asset regulation.
On Jan. 18, associate law professor J.W. Verret addressed the petition to SEC Secretary Vanessa Countryman and according to Verret, the current path the SEC is taking seems not to recognize that digital assets do not fit within the regulatory framework designed for equity investments.
The professor also questioned what requirements the SEC would consider in approving a Bitcoin spot exchange-traded fund.
$590 million in options expire on Friday
Even though Bitcoin is said to be correlated to traditional markets, BTC derivatives traders were not expecting sub-$44,000 prices according to the Jan. 21 options expiry. Friday’s $590 million open interest will allow bears to score up to $82 million if BTC trades below $41,000 during the expiry.
Bitcoin options aggregate open interest for Jan. 21. Source: Coinglass.com
At first sight, the $380 million call (buy) options vastly surpass the $210 million put (sell) instruments, but the 1.81 call-to-put ratio is deceptive because the recent price drop will likely wipe out most of the bullish bets.
There is no value in the right to buy Bitcoin at $44,000 if it is trading below that price. Therefore, if Bitcoin remains below $44,000 at 8:00 am UTC on Jan. 21, only $64 million of those call (buy) options will be available at the expiry.
Bears are comfortable with Bitcoin price below $42,000
Here are the four most likely scenarios for Friday’s $590 million options expiry. The imbalance favoring each side represents the theoretical profit. In other words, depending on the expiry price, the active quantity of call (buy) and put (sell) contracts varies:
Between $40,000 and $41,000: 30 calls vs. 3,320 puts. The net result is $132 million favoring the put (bear) options.
Between $41,000 and $42,000: 170 calls vs. 2,180 puts. The net result is $82 million favoring the put (bear) instruments.
Between $42,000 and $44,000: 1,480 calls vs. 1,130 puts. The net result is balanced between call and put options.
Between $44,000 and $45,000: 2,980 calls vs. 630 puts. The net result favors call (bull) instruments by $103 million.
This crude estimate considers put options being used in bearish bets and call options exclusively in neutral-to-bullish trades. However, this oversimplification disregards more complex investment strategies.
Bulls need $44,000 to bag a $103 million profit
Regulatory uncertainty and Federal Reserve monetary policies might be reasons for the recent market weakness, but a mere 5% price pump from the current $42,000 level is enough for Bitcoin bulls to profit $103 million in Friday’s expiry.
However, if the current short-term negative sentiment prevails, bears could easily pressure the price below $41,000 and pocket $132 million gains.
Currently, options markets data slightly favor the put (sell) options, but the outcome is yet to be seen.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Bitcoin (BTC) has been below $45,000 for 14 days and is currently 40% below the $69,000 all-time high. This movement holds similarities to late-September 2021, when Bitcoin price flat-lined for 11 days and was 36% below the previous $64,900 all-time high on April 14.
Bitcoin price at Coinbase, USD. Source: TradingView
To understand whether the current price momentum mimics late September, traders should start by analyzing the Bitcoin futures contracts premium, which is also known as “basis.” Unlike a perpetual contract, these fixed-calendar futures do not have a funding rate, so their price will differ vastly from regular spot exchanges.
By measuring the expense gap between futures and the regular spot market, a trader can gauge the level of bullishness in the market. Excessive optimism from buyers tends to make the three-month futures contract to trade at a 15% or higher annualized premium (basis).
Bitcoin 3-month futures premium in Sept. 2021. Source: laevitas.ch
For example, earlier in September, the basis rate ranged from 9% to 13%, indicating confidence, but on Sept. 29, right before Bitcoin broke out above $45,000, the 3-month futures premium was at 6.5%. Generally, readings below 5% are typically deemed bearish, so a 6.5% reading in late September meant investors were displaying low confidence.
Regarding the current market conditions, there are a lot of similarities to September 2021, right before Bitcoin broke $45,000 and initiated a 62% rally. First, the current Bitcoin 3-month futures premium stands at 6.5% and the indicator recently ranged from 9% to 11%, reflecting mild optimism.
Unexpected positive market moves happen when investors least expect it and this is precisely the scenario happening right now. To confirm whether this move was specific to the instrument, one should also analyze options markets. The 25% delta skew compares equivalent call (buy) and put (sell) options. The indicator will turn positive when “fear” is prevalent because the protective put options premium is higher than the call options.
Related:What bear market? Current BTC price dip still matches previous Bitcoin cycles, says analyst
The opposite holds when market makers are bullish, causing the 25% delta skew to shift to the negative area. Readings between negative 8% and positive 8% are usually deemed neutral.
The 25% delta skew ranged near 10% by late Sept. 2021, indicating distress from options traders. Market makers and arbitrage desks were overcharging for protective put (bearish) positions.
According to the current 25% delta skew indicator, options traders are neutral. However, on Jan. 10 the metric touched the 8% positive threshold, signaling a mild bearishness.
Derivatives metrics show that the current market conditions resemble late-September when Bitcoin reversed a 24-day downtrend and initiated a 62% rally in the following three weeks.
Will this phenomenon repeat itself? Bitcoin bulls certainly hope so.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Ether (ETH) price has bounced 13% from its Jan. 9 low at $2,950, but it seems premature to call the move a cycle bottom. Instead, the larger bearish movement has prevailed and although it looks primarily correlated to Bitcoin (BTC) price, regulatory concerns and a tighter United States Federal Reserve policy have also been blamed for the movement.
BTC and Ether have been under pressure since regulators focused their attention on stablecoins. On Nov. 1, the U.S. Treasury Department urged Congress to ensure that stablecoin issuers are regulated similarly to U.S. banks.
ETH/USD price at FTX. Source: TradingView
Currently, the descending channel formation initiated in mid-November shows resistance at $3,850 resistance. The average network transaction fees have also risen back above $50 and the longer that the Ethereum 2.0 upgrade takes to occur, the better the situation will be for competing chains.
Regardless of the rationale behind Ether’s 28% price drop over the past six weeks, bulls missed the opportunity to secure a $300 million profit in the Jan. 14 weekly options expiry. Unfortunately for them, this $4,500 and higher scenario seems unfeasible at the moment.
Ether options aggregate open interest for Jan. 14. Source: Coinglass.com
The call-to-put ratio shows an 89% advantage for bulls because the $380 million call (buy) instruments have a larger open interest versus the $200 million put (sell) options. The current 1.89 measure is deceptive because the recent Ether price drop caused most of the bullish bets to become worthless.
For example, if Ether’s price remains below $3,300 at 8:00 am UTC on Jan. 14, only $24 million worth of these call (buy) options will be available, but there is no value in having the right to buy Ether at $3,300 if it is trading below that price.
Related:Cointelegraph Consulting – A look at Terra’s ecosystem
Bears need ETH price below $3,300 to secure a $65 million profit
Below are the three most likely scenarios based on the current price action. The number of option contracts available on Jan. 14 for bulls (call) and bear (put) instruments vary depending on the expiry ETH price. The imbalance favoring each side constitutes the theoretical profit:
Between $3,100 and $3,300: 7,400 calls vs. 27,800 puts. The net result favors bears by $65 million.
Between $3,300 and $3,500: 22,200 calls vs. 19,300 puts. The net result is balanced between bulls and bears.
Above $3,500: 32,500 calls vs. 15,600 puts. The net result is $60 million favoring the call (bull) instruments.
This crude estimate considers call options being used in bullish bets and put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.
For instance, a trader could have sold a put option, effectively gaining a positive exposure to Ether above a specific price. But, unfortunately, there’s no easy way to estimate this effect.
Bulls don’t stand a chance
Ether bulls would have had a decent $300 million advantage if the price held above $4,500. However, the current scenario requires a 6% positive move from $3,300 to $3,500 to generate a $60 million advantage.
Considering there are less than 12 hours until Friday’s options expiry, bulls will likely concentrate their efforts on keeping the price above $3,300 to balance out the scales.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Dopex is a decentralized options exchange that uses option pools to let anyone buy or sell options in a capital efficient and simplified manner.
Its flagship product is Single Staking Option Vaults, which provide deep liquidity for option buyers and automated, passive income for option sellers.
Dopex’s options contracts are ERC-20 tokens, meaning they’re liquid, transferable, and composable.
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Dopex, which stands for “decentralized options exchange,” is a DeFi protocol that seeks to maximize liquidity and maximize returns for option buyers and sellers.
A Quick Primer on Options
Dopex is a decentralized options exchange that uses option pools to let anyone buy or sell options contracts and passively earn yield.
It offers advantages to both options buyers and sellers and the wider DeFi ecosystem by delivering a permissionless and composable options product that can be used in conjunction with other protocols. It ensures fair, optimized, and competitive option pricing and a simplified trading experience.
To understand the value proposition of Dopex, it’s worth explaining how options contracts work. Options are derivative financial instruments that let investors speculate or hedge against the volatility of an underlying asset like a stock, cryptocurrency, or another derivative or synthetic instrument representing, for instance, the volatility of interest rates.
There are two types of options contracts: call options and put options. Call options give buyers the right but not the obligation to buy the underlying asset at a specified price called a strike price, before or at a specific expiry date. Conversely, put options give contract holders the right but not the obligation to sell the underlying asset at the strike price before or at an expiry date.
With call options, the buyers are betting on the underlying asset’s price increasing, while the sellers are betting on the price decreasing.Put options, on the other hand, are the opposite: the buyers are betting on the asset’s price decreasing, while the sellers are betting on the price increasing.
Options also have a price or a premium that buyers pay upfront for the rights granted by the contract. For buyers, options contracts offer an opportunity to short assets, take on leverage, or hedge bets, while sellers can take the other side of those trades and simultaneously earn passive income by collecting premiums.
To make the concept more tangible, assume an investor would be happy to sell their Ethereum at $5,000, but the price is holding around $3,000. They believe that Ethereum will eventually reach the $5,000 mark but don’t know exactly when. They could use options to sell a covered call contract, giving someone else the right to purchase the Ethereum at $5,000. This would mean they forego any upside past the strike price in exchange for the premium they earn from selling the option. They could choose a contract that expires in March 2022 if they do not believe that Ethereum has the capacity to hit the $5,000 strike price before the expiry.
Now, if the options seller is right in their forecast and Ethereum hits $4,000 but does not break the $5,000 strike price before the March expiry, they would get to keep their coins plus a premium. On the other hand, if they’re wrong and Ethereum surpasses $6,000, for example, they would still have to sell at $5,000, meaning they would make some money on the premium but incur an opportunity cost of $1,000.
The user interfaces for Deribit (left) and Dopex (right)
While options may sound rather straightforward in theory, they are complex financial instruments that few retail market participants understand or know how to trade profitably.
that unsophisticated investors can hardly understand, let alone trade profitably. This is where Dopex comes in. Dopex abstracts all the nuances and intricacies that come with option writing and purchasing by optimizing for simplicity and efficiency.
Crypto Briefing caught up with a Dopex core team member who operates under the pseudonym Halko, and they explained that the project is hoping to make options more accessible to all DeFi users. “The idea is not to build another protocol for experienced options traders,” they said. “For that, people can just go and trade on Deribit or FTX. We wanted to build a product anyone can use, and we’re building based on the needs and wants of the community.”
Dopex Under The Hood
Dopex is building a decentralized and permissionless options exchange that aims to offer maximum liquidity, fair option pricing, high capital efficiency for sellers, cheaper options for buyers, and incentives for all protocol participants.
It runs onArbitrum, a Layer 2scaling solutionthat leverages Optimistic Rollup technology to process transactions faster and at a lower cost than Ethereum mainnet. “We launched on Layer 2 simply because Ethereum trading fees are too expensive. It’s really important for options trading to keep the costs really low to ensure profitability,” Halko said. “Arbitrum was the fastest [Layer 2 solution] to open its testnet to developers; to build on Optimism, you must be whitelisted.”
According to Halko, there was a potential risk to launching on other Layer 1 chains such asSolana, Avalanche, and NEAR, because they don’t have “Lindy.” The “Lindy Effect” argues that the life expectancy of technology or ideas is proportional to their current age. In other words, as Ethereum has been around for longer than most other blockchains, it may be more likely to survive. “We don’t know where [other Layer 1 blockchains] will be two to three years from now, while with rollups, we’re is still on Ethereum, so it’s also a security element,” they said.
One of the advantages of using decentralized or on-chain options protocols over centralized ones is that they offer greater efficiency. Halko explained that Dopex can charge considerably less than centralized exchanges for options products. This is because the products require less maintenance and are easier to scale once they are deployed on-chain. Hence, options on Dopex are typically a few dollars cheaper than on centralized exchanges like Deribit or FTX. Halko says the difference in price is enough to make them more attractive to users without incentivizing arbitrage.
Dopex currently offers only one product called Single Staking Option Vaults, which represents a simplified way to buy and sell options. Discussing how the product works, Halko said:
“Single Staking Option Vaults allow us to bootstrap an options market very simply. We don’t want to overwhelm people, so we’re keeping it simple by offering only call options with a few strikes. Plus, building new vaults on new products is very easy, allowing us to expand the product line without introducing complexity. The vaults are also farming yield in the background. People love it; it helps us acquire more users and build a large community.”
Single Staking Option Vaults (Source: Dopex)
Dopex’s next core product, Option Pools, will be more complex and suited for more experienced options traders. “When they go live, option pools will very much be like options on FTX or Deribit, but on-chain,” Halko said. The code and frontend for the Option Pools are already finalized, but Dopex wants acquire more users before it launches them. In the meantime, the team is also working on an OTC portal where users will be able to trade options peer-to-peer on the secondary market.
That’s another one of Dopex’s advantages—all of the options contracts are ERC-20 tokens, meaning they’re liquid, transferable, and composable. Anyone building in DeFi on Ethereum can use Dopex’s options and integrate them into their protocols in some shape or form. One such project is Jones DAO, which is building vaults that will let users generate yield with sophisticated, actively managed, hedged options strategies on top of Dopex.
Single Staking Option Vaults Explained
Single Staking Option Vaults are Dopex’s flagship product. Similar to single-sided staking vaults on other protocols, they let users lock up tokens for a specified period and earn a passive yield on their staked assets.
There are two sides to the product: stakers and option buyers. The stakers deposit and lock liquidity in base assets (ETH, gOHM, DPX, and rDPX) or quote assets (dollar-pegged stablecoins) into a vault at the beginning and for the duration of each monthly epoch. The vault contract then sells call options on the underlying assets to earn premiums and deposit the funds in single staking DeFi pools to generate additional yield. Dopex also incentivizes liquidity providers by paying rewards in DPX—one of its two native tokens. To stakers or option sellers, Single Staking Option Vaults provide boosted yields, capped upside, and partially mitigated downside risk—all on autopilot.
For buyers, Dopex offers a user experience for buying call options that rivals the likes of Robinhood. There are only three steps to take: select options size, select strike price, and purchase. The call options are European, meaning the buyer can exercise them only at the expiry date. If the options are “in the money” at expiry, the buyer profits at the cost of staker. By contrast, if the options are “out of the money” at expiry, the buyer lose what they paid, and the money or the premium stays with the staker or options seller. Single Staking Option Vaults represent a simple and relatively inexpensive way for buyers to permissionlessly purchase call options on a variety of crypto assets.
What’s Next for Dopex?
Dopex roadmap includes plans to expand its product line with Option Pools, add new types of Single Staking Option Vaults, offer options on networks like Binance Smart Chain, Avalanche, and Fantom, build the OTC marketplace, and revamp the tokenomics for its rDPX token.
Besides introducing put option vaults and new vaults for a variety of exotic tokens, perhaps the most interesting development is Dopex’s plan to launch options contracts for betting on the possibility of an Arbitrum token airdrop and interest rate options that would allow users to bet on the direction of the interest rate of a chosen Curve pool.
Halko says the Arbitrum option contract is just for fun, but offering a way to bet on Curve pools could affect Ethereum’s entire DeFi landscape by empowering participants in the “Curve Wars.” The Curve Wars can be described as a game between DeFi protocols that centers on the largest decentralized exchange for stablecoins, Curve Finance. Protocols are increasingly making efforts to exert influence over Curve to ensure that their preferred pools are offering the highest liquidity incentives. The likes of Convex Finance and Yearn.Finance offer generous staking rewards on CRV tokens as a way of attracting liquidity and increasing their voting power by locking up tokens to convert them into veCRV.
Using Dopex’s novelinterest rate options, protocols like Redacted Cartel and Convex Finance could hedge their treasury portfolios or make directional bets on the interest rate volatility of different Curve pools, then leverage their outsized influence over the protocol to make their bets pay off. By introducing this novel primitive, Dopex will essentially be adding another weapon to the arsenal of participants in the Curve Wars. This could completely change the dynamics and outcome of the Curve Wars.
Dopex is also in the process of overhauling the tokenomics of the rDPX token. It was initially designed as a rebate token to cover any losses incurred by pool participants. The team has since moved away from this model and will soon publish the new tokenomics. Meanwhile, the use cases for Dopex’s second native token, DPX, will stay the same—it will continue to be a vanilla governance and protocol fee accrual token.
Ultimately, Dopex wants to become the largest options trading platform in crypto. “Deribit is our end game boss,” Halko told Crypto Briefing. Dopex has reached a total value locked of around $500 million within seven months of launching—an impressive feat for a protocol hosted on a nascent ecosystem like Arbitrum. Whether it will manage to surpass established centralized options exchanges like Deribit or FTX remains to be seen. What is certain, however, is that Dopex has a clear product-market fit and an experienced team that continues to deliver.
Disclosure: At the time of writing, the author of this feature owned ETH and several other cryptocurrencies.
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