The State of Options in the Crypto World

In my last article, I gave a little introduction to options trading. Now that we have the basics established, I wanted to talk a little bit about the current state of options trading in the cryptocurrency space. When it comes to variety, cryptocurrency options exchanges are far less numerous than standard cryptocurrency exchanges, giving option traders fewer platforms to choose from. Not surprisingly, a small handful of crypto option trading dominate most of the trading action. In this article, we’ll look at the leading centralized exchanges and take a peer into upcoming decentralized platforms pushing the boundaries of financial products.

Deribit

Deribit is an EU based exchange, offering European style Bitcoin and Ethereum options (if you remember from my last article, European options can only be exercised at expiration, not before like their American counterparts). Additionally, Deribit also offers a wide variety of BTC and ETH futures, including perpetuals and fixed expiry variants.

Going by industry standard, Deribit uses a maker-taker model for its fees, offering reduced fees for market makers. For Bitcoin (BTC) and Ethereum (ETH) options, Deribit charge 0.04% of the underlying asset value per contract; when the option is settled, an additional 0.02% delivery fee is charged.

Using the platform is relatively straightforward, with the exchange being neatly separated into futures and options sections. Users can buy or sell options contracts in as little as three clicks, by selecting an expiry date, entering a quantity and selecting the buy or sell option in the limit order screen.

Security-wise, Deribit falls roughly in-line with the industry standard, storing around 95% of user funds in cold storage, and running a bug bounty program to ensure the platform remains free of vulnerabilities.

FTX

FTX is a derivatives exchange launched by market maker Alameda Research, one of the largest and most liquid OTC desks in the world. Unlike the other platforms in this list, FTX stands out by offering a wide variety of products beyond options, including tokenized stocks, prediction markets, and traditional spot purchases.

While competitors only list a handful of options that are traded with a traditional orderbook, FTX stands out by offering endless strike prices and expiration times through its “Request For Quote’’ system. The benefit of this is that FTX doesn’t have to list hundreds (or thousands) of different order books, and traders can simply fill out a form with the option they are interested in, and request it from FTX directly.

Further, while not strictly Bitcoin options, it’s important to outline that FTX also offers “MOVE” contracts, which work similarly to options in some aspects. The MOVE contract gives traders the ability to bet on the absolute value of a move in a specific timeframe. (EXAMPLE: If Bitcoin drops from 9000 to 8500 on a particular day, the MOVE contract would expire at $500)

FTX charges a flat 0.05% fee for all options and MOVE contracts trades, which can be reduced by using the FTT token or by reaching certain monthly volume requirements.

Binance

Crypto exchange Binance announced a new type of Bitcoin options contract in late 2020 that simplifies things for traders and lets them issue their own contracts for the first time. Binance’s “European-Style Vanilla Bitcoin Options” (the name “vanilla” options derives from being viewed as less exotic than American options) allow users to buy Bitcoin at an agreed-upon price upon the expiry of the contract, then trade it for other cryptocurrencies.

Binance claims that these European-style contracts also protect traders from volatility; investors can sell these contracts at a specified price within an agreed upon time frame, where they’re settled in the US dollar-pegged stablecoin, Tether (USDT). However, it is fair to mention that European-style contracts also come with greater risk/reward. While Binance was the sole-issuer of American-style contracts, traders can issue these European-style options themselves. In effect, this means that users can gain complete control: there are no limits on the size of the contract, as long as the issuer has enough collateral.

Antimatter Finance

And now, the fun stuff. Decentralized options finally coming to DeFi!

AntiMatter is an exciting new DeFi project striving to become the Uniswap for options and derivatives. A major factor in the meteoric rise of platforms like UNI, CAKE, and SUSHI Uniswap is the ease of use, even for less technical or trading savvy users. AntiMatter wants to bring this simplicity and flexibility with their products for options and derivatives to crypto.

Current DeFi derivative platforms are more complex than centralized exchanges, with no active DeFi platforms where non-experienced users can execute their long and short strategies, hindering mass adoption and retail use. To build financial products for mass adoption, Antimatter aims for simplicity. The initial Antimatter product will be an ETH perpetual put option product where anyone can short and long at any given time with secondary market opportunities (market-making and arbitrage). In order to make this possible on a technical level, Antimatter is introducing the concept of Polarized Tokens. An option product will always consist of two forces: positive (call) and negative (put). By trading these products, users can get exposure to the option and thus either a call or a put.

Hegic

Hegic is an on-chain options trading protocol on Ethereum that utilizes a pooled liquidity model, which is the key to Hegic’s way of options creation and premium distribution. In effect, this means that the counterparty for options buyers is the whole smart contract vault.

Hegic has both American calls and puts for Ethereum (ETH). Accordingly, it currently has two pools: one pool of DAI that serves as collateral for those who would like to mint and purchase puts, and one pool of ETH that serves as collateral for those who would like to mint and purchase calls. Those who provide liquidity to either of these pools share in the profits earned from premiums written on bespoke options created by the options buyers based on the pool assets. These liquidity providers (LPs) also share in the losses should the collateral be claimed back from the pool by in-the-money options writers.

Unlike other DEX option models (like OPYN), the LPs in the Hegic options model do not directly mint option tokens themselves. They are options LPs, not options writers. Thus, they cannot control the exact options that the options buyers (who decide the options terms in this case) pay premiums for. Each option written is unique and is 1) based on the price of ETH at the time of the minting and 2) based on the option writer’s selection of one of 5 times to expiry, currently 1, 7, 14, 21, or 28 days.

By providing assets (ETH or DAI) into a pool, like with Aave or Compound, Hegic LPs receive writeETH or writeDAI Tokens that are automatically minted and give the LP a share in the liquidity pool. Premiums and losses are distributed between all the LPs. When writers wish to receive their ETH or DAI back, they just call the Withdraw function of the smart contract, which burns their writeETH or writeDAI tokens and returns their share of the ETH or DAI in the pool at that moment.

Now that you know the lay of the land for cryptocurrency options and have a little introduction to DeFi derivative products, we can’t wait to share our next article about 3Commas dive into DeFi in the Solana ecosystem… stay tuned!