In light of the crypto markets drawing down the last month before the more recent BTC surge, I thought it might be timely to share how I’ve used on-chain options to hedge against my long exposure to ETH and BTC. Despite the fact I’m not an options trader and do not deserve to be advising anyone how to trade options, using options as a potential insurance against volatile price movements is something I do understand when seeking to hedge a position without having to KYC or sign up with a centralized exchange. Thanks to the launch of Hegic this past year, we have non-custodial on-chain options for ETH and WBTC trading on Ethereum! Check out the growth of total value locked (TVL) in Hegic over the last month according to DeBank.
For those new to options, an option is a contract giving the buyer the right, but not the obligation, to buy (in the case of a call option contract) or sell (in the case of a put option contract) the underlying asset at a specific price on or before a certain date. Traders can use on-chain options for speculation or to hedge their positions. Options are known as derivatives because they derive their value from an underlying asset.
Hegic is an on-chain options trading protocol on Ethereum, where you can buy WBTC or ETH call or put options or you can even sell call or put options as a liquidity provider (LP). You can buy WBTC or ETH call and put options as an individual holder (buyer) or sell ETH call and put options as one of the liquidity providers.
What’s separates Hegic on-chain options from traditional finance, and I’m quoting the Hegic website below is:
- Non-custodial 24/7 global options trading
- Verified on-chain settlement of each option contract
- Choose any strike price for WBTC or ETH call or put options
- Exercise at any moment during the period of holding a contract
- Exercising is guaranteed by the liquidity locked on an option contract
- Censorship-resistant protocol without a KYC, email or registration required
- Earn yield on WBTC or ETH as an LP
- Liquidity auto diversification among all the contracts for the options writers
The basics of how Hegic put options work
For this post, I want to focus on how to use Hegic put options to hedge against the downside in a long ETH position. Hegic is one of the simplest interfaces to buy or sell on-chain put and call options for ETH or WBTC. But first we need to cover a few basics of how options work!
A put is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a specified price within a certain time. The pre-determined price the put option buyer can sell at is called the strike price, which in Hegic you can specify yourself, according to the market price of the underlying asset (ETH or WBTC) or any price lower.
- Potential profitincreases as the level of the underlying asset (ETH or WBTC) decreases to zero
- Potential loss is limited to the premium paid for a put option contract (ie $10.01 below)
- Options buyers are break-even at the price level equivalent to the strike price minus the premium paid, meaning if I buy 1 ETH put for $10.01 at a strike price of $383.48, than I’m break-even if ETH price falls to $373.47
Next thing you need to know is what the expiration date and time refers to. With Hegic options, the expiration date is the last day that options contracts…
Hi! My name is Lark Davis!
I’m a cryptocurrency investor with years of experience and I’ve been making consistent profits in the crypto space.
I’m passionate about helping others do the same, so I run multiple educational channels on crypto investing.
