Crypto #options must overcome a massive demand gap for it to be a meaningful on-chain sector, and we are nowhere near there.
Here is a simple mental model to ponder over the demand for crypto options. 🧵 👇
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Here is a simple mental model to ponder over the demand for crypto options. 🧵 👇
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#Options have traditionally played second fiddle to the spot and futures market in crypto.
However, we are witnessing an increase in interest in options lately as protocols like @dopex_io @ribbonfinance @lyrafinance @opyn_ @PremiaFinance are gaining traction within CT.
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However, we are witnessing an increase in interest in options lately as protocols like @dopex_io @ribbonfinance @lyrafinance @opyn_ @PremiaFinance are gaining traction within CT.
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The #options market in #TradFi is massive, with daily volumes in the billions.
Options volume on single-name stocks soared during 2020 and 2021, exacerbated by the rise of retail investors.
/3
Options volume on single-name stocks soared during 2020 and 2021, exacerbated by the rise of retail investors.
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Because #options on almost any public stock listed on the NYSE are widely available, mainstream retail and degens on r/wsb popularized the use of options for access to convex returns on stocks.
/4
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Interest in #options has recently risen within the crypto community.
For example, #ETH options OI and volume reached all-time highs during the #Merge.
Countless protocols aimed at facilitating option trading are being developed at an unprecedented speed.
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For example, #ETH options OI and volume reached all-time highs during the #Merge.
Countless protocols aimed at facilitating option trading are being developed at an unprecedented speed.
/5
In addition, KOLs are now also publicly revealing their positioning via #options, sparking interest amongst CTs who are new to options.
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https://twitter.com/CryptoHayes/status/1589996842409873409
Elsewhere, the volatility markets are also starting to take shape amongst interested yield hunters.
@QCPCapital published a great article illustrating how trading the variance risk premium had yielded positive returns since the onset of the bear cycle.
/7
@QCPCapital published a great article illustrating how trading the variance risk premium had yielded positive returns since the onset of the bear cycle.
/7
https://twitter.com/QCPCapital/status/1584468315795116032
Given the success of #options in the #TradFi markets and the present trends within the crypto options market itself, the question here to ask is:
Will crypto options replicate the success seen in TradFi?
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Will crypto options replicate the success seen in TradFi?
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While there are numerous factors that can influence the success of crypto #options, this thread will primarily focus on the demand factor.
After all, demand is the single most important factor in the equation.
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After all, demand is the single most important factor in the equation.
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Before going into demand, here are the three main use cases of options.
1️⃣ Hedging
2️⃣ Speculation
3️⃣ Yield-generation
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1️⃣ Hedging
2️⃣ Speculation
3️⃣ Yield-generation
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We can also generalize three main investor profile that uses options.
1️⃣ Institution/Funds
2️⃣ Sophisticated/Super-retail
3️⃣ Mainstream retail
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1️⃣ Institution/Funds
2️⃣ Sophisticated/Super-retail
3️⃣ Mainstream retail
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Let's start with institutions and funds. #Options are primarily used by these participants to hedge their delta exposure.
In TradFi, funds may deploy a simple hedging strategy that rolls put options on indices or single-name stocks depending on their mandate.
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In TradFi, funds may deploy a simple hedging strategy that rolls put options on indices or single-name stocks depending on their mandate.
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Aside from that, they may use covered calls to generate #yield on their holdings (i.e., on spot #BTC or #ETH in crypto).
Some funds may also use options to gain convex directional exposure and/or trade the volatility surface.
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Some funds may also use options to gain convex directional exposure and/or trade the volatility surface.
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Then there are sophisticated/super-retails. They may engage in higher-order movement trading in addition to hedging and speculation.
Trading the level of skew, arbitraging mispriced options, or even doing relative value trades are some examples.
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Trading the level of skew, arbitraging mispriced options, or even doing relative value trades are some examples.
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Because of their smaller size, they are able to capitalize on such inefficiencies in the options market.
They are also extremely price-sensitive, which means they do not buy or sell options arbitrarily.
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They are also extremely price-sensitive, which means they do not buy or sell options arbitrarily.
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The final group of participants is your friendly retail/normie.
This group of people may have a rudimentary understanding of options. They may engage in the hedging of their positions, however, at a smaller scale given the size of their portfolio.
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This group of people may have a rudimentary understanding of options. They may engage in the hedging of their positions, however, at a smaller scale given the size of their portfolio.
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Their biggest motivation, however, to use options is the risk allure and convex returns that it offers. Hence, they largely fall under the category of speculation.
They are also price-insensitive, which means they buy and sell at whatever the bid/ask price is.
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They are also price-insensitive, which means they buy and sell at whatever the bid/ask price is.
/17
The question is: Has mainstream retail caught on with crypto #options yet?
IMO, no.
Aside from #DOVs, retail volume for crypto options continues to lag behind institutional/block volume.
Here are some possible conjectures.
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IMO, no.
Aside from #DOVs, retail volume for crypto options continues to lag behind institutional/block volume.
Here are some possible conjectures.
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1️⃣ Leverage is abundant
Most stock traders and investors do not have access to leverage. Users of margin accounts must complete KYC and knowledge tests which can be troublesome.
#CEXs and #DEXs, on the other hand, easily grant users up to x125 leverage on perps.
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Most stock traders and investors do not have access to leverage. Users of margin accounts must complete KYC and knowledge tests which can be troublesome.
#CEXs and #DEXs, on the other hand, easily grant users up to x125 leverage on perps.
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This is why retail traders on TradFi frequently use options to gain leverage and convex returns. 📈
As a result, there is no reason for crypto traders to use options when leverage is much more accessible and cheaper on crypto.
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As a result, there is no reason for crypto traders to use options when leverage is much more accessible and cheaper on crypto.
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2️⃣ Lack of long-tailed assets
#Options are currently available on only a few crypto assets. Meanwhile, options on almost any publicly traded stock on the #NYSE are available.
A typical degen would be unsatisfied with #BTC/#ETH options with r.vol as low as 25%.
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#Options are currently available on only a few crypto assets. Meanwhile, options on almost any publicly traded stock on the #NYSE are available.
A typical degen would be unsatisfied with #BTC/#ETH options with r.vol as low as 25%.
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If we look at what drove TradFi #options volume, it was on single-name stocks with extremely high volatility, such as $GME, $BBBY, and $AMC. 🚀
To date, there are still no options on long-tail assets in crypto, simply because no one wants to make a market on it.
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To date, there are still no options on long-tail assets in crypto, simply because no one wants to make a market on it.
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As a result, it is hard (for now) to see any meaningful increase in demand for #options amongst retail investors/traders on crypto, where leverage and variety are abundant and accessible on traditional spot/perps instruments.
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It is possible that the future of crypto #options will be geared solely at institutions and sophisticated retail.
The future of crypto options may not be as rosy as some claim unless retail adoption occurs.
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The future of crypto options may not be as rosy as some claim unless retail adoption occurs.
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#Education, in my opinion, takes precedence over everything else.
Education on options could be a catalyst for retail adoption, similar to how countless normie-friendly DeFi threads and articles helped bootstrap millions of newcomers during the previous bull market.
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Education on options could be a catalyst for retail adoption, similar to how countless normie-friendly DeFi threads and articles helped bootstrap millions of newcomers during the previous bull market.
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These are just my two cents.
If you enjoyed this thread and had learned something, like and RT the first tweet.
Do remember to drop a follow to support my page :)
If you enjoyed this thread and had learned something, like and RT the first tweet.
https://twitter.com/j_mokwh/status/1607331230814724097
Do remember to drop a follow to support my page :)
As usual, tagging option lords to get some feedback.
@CryptoDeFiGuy
@OssaCapital
@4adybug
@RNR_0
@PelionCap
@laevitas1
@tradeparadigm
@Blofin_Official
@genesisvol
@GreeksLive
@Gravity5ucks
@hansolar21
@ResearchVariant
@bit_hedge
@JeffLia12309881
@JSterz
@thiccythot_
@CryptoDeFiGuy
@OssaCapital
@4adybug
@RNR_0
@PelionCap
@laevitas1
@tradeparadigm
@Blofin_Official
@genesisvol
@GreeksLive
@Gravity5ucks
@hansolar21
@ResearchVariant
@bit_hedge
@JeffLia12309881
@JSterz
@thiccythot_
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