What Are Crypto Options?
Options rank among the most versatile yet complex financial derivatives. While their potential in DeFi remains underexplored, protocols like Lyra are pioneering innovative solutions by combining European-style options with liquidity pools (AMMs). This fusion addresses traditional liquidity challenges, offering traders a seamless experience compared to conventional platforms.
👉 Discover how Lyra revolutionizes options trading
Core Topics Covered:
- Definition of options
- Why trade options?
- Types of options
- Trader profiles
- Risk management
This chapter equips beginners with foundational knowledge for European options strategies, with later sections delving into practical examples.
Understanding Options
An option is a derivative contract granting the buyer the right (and the seller the obligation) to transact an asset at a predetermined price (strike price) on or before an expiration date.
Example:
Li Lei buys a call option from Han Meimei:
- Strike Price: $3,500/ETH
- Expiration: 2 weeks
- Premium Paid: $200
Scenario 1 – In-the-Money (ITM):
If ETH rises above $3,500, Li Lei profits by exercising the option. Han Meimei must honor the strike price.
Scenario 2 – Out-of-the-Money (OTM):
If ETH stays below $3,500, Li Lei lets the option expire, losing only the $200 premium.
Key Advantage: Lyra’s liquidity pool eliminates traditional bottlenecks, allowing traders to exit positions anytime.
Why Trade Options?
1. Directional Speculation
- Leverage: Small capital controls large positions.
- Unlimited Upside: Calls profit if the asset surges.
- Limited Risk: Losses capped at the premium paid.
2. Portfolio Hedging
- Insurance: Puts protect against downside risk.
- Example: Lock in ETH gains at $3,000 while retaining upside potential.
3. Income Generation
- Covered Calls: Earn premiums on held assets.
- Cash-Secured Puts: Generate yield while waiting to buy at lower prices.
👉 Explore income strategies on Lyra
Types of Options
| Strategy | Trader’s Expectation | Max Profit | Max Loss |
|---|---|---|---|
| Long Call | Bullish | Unlimited | Premium Paid |
| Long Put | Bearish | Strike – Premium | Premium Paid |
| Short Call | Neutral/Bearish | Premium | Unlimited (Risky) |
| Short Put | Neutral/Bullish | Premium | Strike – Premium |
Who Trades Options?
Retail Traders
- Use leverage without liquidation risks.
- Hedge portfolios with puts.
Institutional Players
- Market makers provide liquidity.
- Hedge tail risks (e.g., miners buying puts).
Risks to Consider
- Complexity: Master Greeks (Delta, Theta) and volatility trends.
- Pricing Factors: Premiums depend on implied volatility, time decay.
- Seller Risks: Obligations exceed premiums received.
- Time Decay: Options lose value as expiration nears (Theta effect).
Key Terminology
- ITM/OTM/ATM: In/Out/At-the-Money
- American vs. European: Early vs. expiry-only exercise
- Legs: Components of multi-part strategies
FAQ
Q: Can I exit options early on Lyra?
A: Yes! Lyra’s liquidity pool ensures instant exits.
Q: Are covered calls safe?
A: Safer than naked calls but still subject to asset risk.
Q: How do I hedge with puts?
A: Buy puts equal to 5–10% of your portfolio value.
Ready to test your knowledge? Take our interactive quiz here.
Lyra is an Ethereum-based options protocol using BSM pricing and skew adjustments. Join the community on Discord or follow Twitter for updates.