Common Types of DeFi Options
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DeFi Options: CSPs and CCs
Vaults for Cash-Secured-Puts (CSPs) and Covered-Calls (CCs) are the most prevalent sort of Defi Options. Vaults offer CSPs and CCs against investors' staked assets at a "secure" strike price, then distribute the premium created by the options as APY to investors.
When an investor sells the right to acquire an asset at a striking price, it is known as a CC.
For instance: For $14.81 per ETH, you can sell the right to buy your ETH for $3200 on Friday. If the price of ETH is greater than $3200 on Friday, you sell the ETH and keep the premium. You keep your ETH and the premium if it's less than $3200.
A CSP is the polar opposite of a CSP. Investors are compensated for agreeing to buy an asset at a specific price.
For instance: For every $2900 invested in ETH, you can earn $33. If the price is $2900 on Friday, you buy ETH at that price and keep the premium. If it's more than $2900, you keep the premium and your $2900.
Settlement in DeFi options
Almost all Defi options are "cash-settled" rather than "physically settled." Now, only options that expire "in the money" (ITM) are subject to settlement. Because your assets were inside the strike price, you would have had to acquire or sell them if you were in the money.
A cash-secured put buys the asset and a covered call sells it with the physical settlement. You would simply lose a percentage of your staked assets equivalent to the loss you would have incurred through physical settlement if you chose cash settlement.
For instance: if you sold a CSP for ETH at a strike price of $2900 and the price at expiry was $2850, you would be -$50 (not counting premium).
Another thing to keep in mind is when you will receive the yield. You can deposit funds in Thetanuts at any time, but you won't get a payout until the following epoch begins. This means that pulling your UST out of anchor may result in an opportunity cost (in this scenario), e.g., Conversely, if you don't deposit into the vault quickly enough, it may fill up, and you may miss out on the opportunity to participate in the yield.
In the end, these are intriguing prospects that come with some risk. Analytical data is a wonderful approach to assessing risk before entrusting a process with determining the best strikes for their vaults. However, they almost all utilize the same strikes and only hit a small percentage of the time.
Finally, most of these protocols delegate their option purchasing to other protocols (e.g., PsyOps and Ribbon), so you can go directly to the source for the finest analytics and yields on occasion.
Final thoughts
You can never completely eliminate market risk when trading crypto options. Things that can influence the entire crypto market at once, like the onset of a worldwide economic recession, are examples of this type of risk factor. Options traders are also exposed to price risk, such as if their trade expires out-of-the-money (OTM).
In the case of Defi alternatives protocols, users may be exposed to smart contract risk, such as a coding fault being identified and exploited by a hacker. There's also the possibility of regulatory action, such as a protocol's liquidity drying up once a government watchdog deems it an unregistered securities exchange.
Hence, always do your research properly, before committing your funds to any of the Defi protocols. Invest wisely!