The Value of Options Vaults

Intro

Options are popular tools in traditional markets for managing risk, taking leveraged exposure and otherwise non-linearly adjusting payoff profiles of investment and trading strategies. The product’s flexibility has driven exchange-traded options volumes above those of cash equities. OTC (non-exchange traded) options are even more popular and not included in the chart below. Options on swaps, for example, traded more than $1 trillion in notional in Q1 2021.

A call option is the right but not the obligation to buy a predetermined amount of an underlying asset at a fixed price (the “strike”) over a predetermined time horizon (up to or at “expiry”, depending on the type of option). A put option is a right to sell the underlying. Put options are bought to hedge long exposure to an asset, commodity, currency or interest rate position. Call options are often purchased to lever up a long position. The cost of a call is generally many times smaller than the cost to purchase the underlying outright. Options are also used to generate income.

Selling (writing) a call plus holding a long position in a token is called a covered call. A written put that is fully-collateralized with cash is a cash-secured put. Both can be used to generate income on risky digital assets. Both have similar payoffs.

Strategies that work in TradFi should be equally applicable to crypto assets, though there are additional risks to consider. Puts and calls on BTC and ETH are quite actively traded centrally, on Deribit, LedgerX (acquired by FTX) and later CME. Deribit also added Solana options in 2022, largely thanks to options vaults drawing attention to that market’s potential.