As with any market coming of age, crypto has recently seen an explosion in new investment products for market participants to get their hands on. Although most participants dabble in spot markets, the rise of derivative investment products has attracted new and existing market participants. Most recently, crypto has seen the rise of “options,” which offer market participants potentially significantly more upside while also limiting their downside. However, few truly understand options, the risks, and where to trade them.
In this post, we break down what options are, why they’re used, their risks, and how to get your paws on SAMO options. After reading this post, you will better understand what options are and whether or not they’re suitable for you.
What The Heck Are Options?
An options contract is a type of financial instrument valued based on the price of an underlying cryptoasset, like BTC, SOL, or SAMO. But unlike other derivative investments, option holders are not required to buy or sell the cryptoasset. Simply put, an option grants the owner the right, but NOT the obligation, to buy or sell a relatively large sum of crypto at a predetermined price (strike price) within a specific timeframe. Usually, when you purchase an options contract, you will pay a one-time fee known as the option’s “premium.”
A call option grants you the right to BUY the cryptoasset, while a put option grants you the right to SELL the cryptoasset at a set price. For instance, if you buy a SOL call option with a strike price of $100 and a 2-month maturity, you own a contract that states you have the right to buy SOL at $100 within the next two months. If, for example, SOL rises to $140, your options contract is in profit (“in the money”) since you can buy at a much lower price than SOL’s current price. Meanwhile, if you buy a SOL put option with a strike price of $100 and SOL goes to $140, your contract is “out of the money” since the price with which you can sell SOL is lower than the current price of SOL.
To recap, each option has the following properties:
- An underlying crypto that can be bought or sold.
- A strike price, or the predetermined price at which the crypto can be bought/sold.
- A maturity, or the last day an option can be exercised.
- A premium, or the amount paid for an option.
Do note that not all options are created equal. Consider the following:
- Some options will lose more or less value depending on the option’s strike price, the option’s maturity, the volatility of the underlying cryptoasset, and more.
- The closer the strike price is to the asset’s current price and the longer the window to exercise the option, the more expensive it becomes to purchase the options contract (the option’s premium).
- Some options can only be exercised at maturity (European options) instead of being exercised earlier (American options).
- Most options are cash-settled, meaning that physical delivery of the underlying asset or security is NOT required. Instead, the payment amount may be the difference between the option’s strike price and the current value of the crypto at expiration.
So… Why Use Them?
It should first be noted that options are NOT for everyone, and some options can expose you to unlimited losses. It is ultimately up to you to determine if options have a place in your portfolio and if they fit your risk tolerance.
However, those who understand their risks will typically use options to hold a leveraged position in an asset at a lower cost. How? Because the option contract typically entitles the owner the right to buy a significant amount of coins for a relatively small premium. For instance, a call option on BTC entitles the owner to buy 1 BTC while only paying, say, $1,000 – $2,000.
If not used purely for leverage, some market participants will purchase an option as a “hedge” to reduce the risk of an adverse price movement. For example, consider a market participant who wants to continue to own their BTC and wants to protect against BTC falling in value. To protect their investment, they’ll buy a put option. Should BTC fall in price, they’ll profit from the drop while only having to pay a relatively small premium.
Lastly, some market participants will use options to generate income. This can be achieved by selling a call option, selling a put option, or pursuing several different options strategies whereby multiple options and cryptoassets are purchased or sold. The most common type of income strategy for options is a “covered call,” which we’ll dive into next.
The Covered Call
As previously discussed, by buying a call option, you own the right to buy a cryptoasset at a predetermined price within a set window. However, you can also sell a call option whereby you take the otherside of the trade, also known as “writing” an option. That is, you promise to sell the cryptoasset at an agreed-upon price (the option’s strike price). By doing so, you receive the premium from the buyer and are technically short the crypto – you profit so long as the current price of the crypto doesn’t move above the strike price. Think about this like selling upside in order to generate income!
To drive the point home, let’s go through an example using Friktion’s Volt#01, a Covered Call strategy.
- The price of SOL is currently $100, I think the price of SOL will not go above $125 in the next week.
- I sell a call option with a strike price of $125 and an expiry of 1 week – the buyer pays me the premium.
- I now wait for the week to pass with a view that SOL doesn’t climb above $125.
- If SOL expires below $125, I keep the premium (known as the option expiring out-of-the-money). If SOL expires above $125, I have to pay the difference between the strike price and the price of SOL at expiration, still collecting the premium but losing some of my SOL.
Now, if I own the same crypto that I wrote a call option against, I can collect the premium I received from the call buyer while also protecting myself from the cryptoasset rising in value and the call option moving against me. This strategy is known as a “covered call” because I already own the same cryptoasset that I wrote the contract against. This investment strategy can be a lucrative source of income so long as the cryptoasset doesn’t drop meaningfully.
It’s important to note that, like all options contracts, covered call options are not without their risks. Suppose the price of the cryptoasset losses substantial value, the losses from holding the cryptoasset will far outweigh the premium collected. Also, if you sell the underlying cryptoasset while still having written a call contract (also known as holding a “naked call”), a large loss can be realized should the cryptoasset rise in value.
Wen SAMO Covered Calls?
We’re excited to announce that SAMO holders can now use Friktion to sell covered calls on SAMO and other cryptoassets. Thanks to the Friktion team, the SAMO Volt allows users to generate passive yield by depositing their SAMO into a volt and selling (writing) call options on SAMO. Note that SAMO Epochs will be 2 weeks!
Here’s how it works:
- Deposits of SAMO are open at app.friktion.fi/income.
- SAMO holders deposit their SAMO into the SAMO Volt and receive fTokens
- The first Epoch begins on Friday at 2AM UTC, when assets are deployed to write covered calls.
- Friktion holds a blind Dutch auction for option buyers to take the other side of the SAMO calls that are written.
- The fTokens represent your share of ownership in the Volt.
- Your position begins to auto-compound over time from the option premiums.
- The Epoch duration is 2 weeks (meaning at 2AM UTC).
- fTokens can be used to redeem your proportional share of the Volt.
- You can track the yield and price of your fcSAMO on Friktion’s analytics page at app.friktion.fi/analytics/fcSAMO
SAMO Volt Risks:
As previously discussed, covered calls are not risk-free and it is possible that when you go to redeem your fTokens for your share of SAMO, you get a smaller number of SAMO than initially invested. Additionally, like all platforms built on Solana, you could lose the funds deposited due to an unforeseen hack.
We strongly suggest familiarizing yourself with options, their risks, and the Friktion platform itself. You can learn more about Friktion and their Volts by checking out their documentation here.
As you can see, options are a unique means of participating in crypto markets. These complex financial instruments allow market participants to either increase their upside, decrease their downside, and in some cases, achieve both. They’re most certainly risk-free, and anyone interested in trading them ought to understand what they’re getting themselves into and where things could go wrong. Those willing to assume the risks can now get exposure to SAMO covered calls through Friktion’s latest SAMO Volt.
|Disclaimer: This information is general information and is intended for educational purposes only. The information contained herein is not intended to constitute legal, tax, accounting or investment advice. Information, opinions and views are solely the author’s own and should not be used as the basis of any investment decision. When making investment decisions, contact a licensed investment professional who can ensure the suitability of your investments. Do your own research.|