Anyone with eyes on the crypto space is probably all-too-aware that the promising bull-run that started sometime in early April is appearing to have run out of steam. Previously, it was difficult to effectively hedge against price downturns. Sure you could sell your ETH or short ETH on Bitmex, but you would end up creating tax events and/or risking liquidation due to short-term price fluctuations. Optimum now offers a decentralized way for users to hedge against the bear market.

PUT Options

A put option is a financial contract (which we represent by a smart contract) that gives the owner the right to sell an asset at the strike price before the agreed upon expiration date. So lets say you owned 10 contracts of the 800-strike put option on ETH, you could sell 10 ETH for $800 in today’s market. There is however, a catch: you have to pay some amount initially to purchase the contract. If the price of ETH goes up, the premium you paid will be a sunk cost.

Example profit-loss chart of a PUT option. Market price pictured on X-axis, profit-loss on Y-axis.

How do PUTs work on Optimum?

Let’s say you hold 100 ETH, and you want to buy some risk protection because you expect a correction in the market, but you don’t want to sell your ETH. You could buy 10 PUT options for ETH with a strike price of 600 DAI, and an expiration of 3 months (according to our price model this would cost about $800 for $6000 worth of downside protection at the time of this writing). The downside protection is held in our smart contract, completely eliminating counterparty risk.

Steps are as follows:

A buyer and seller agree on contract terms (10 PUT options, strike price 600 DAI, expiring in 3 months, at a price of 80 DAI per option) Either the buyer or seller formalizes the offer by creating a limit order, which is valid for only a short period of time. The other party finalizes the limit order on-chain. 800 DAI is paid by the buyer, and the 6,000 DAI from the seller is reserved for contract execution. When the owner wishes to exercise the contract, they sell 10 ETH and receive 6,000 DAI. The counterparty is assigned the 10 ETH and loses their 6,000 DAI and the contract is considered “settled”.

A Word of Caution

Options trading is not without risk. It can certainly be lucrative, but it can also be highly risky. Options are not suitable for all investors. That being said if you’re interested in participating in our over-the-counter market, join us on Telegram or subscribe to our Reddit . You can also go straight to the exchange.