Decentralized finance (DeFi) is fast becoming the preferred route for hedging smaller cryptocurrencies outside of bitcoin (BTC) and ether (ETH), as leading centralized stock exchanges such as the Chicago Mercantile Exchange and Deribit remain fixed at two market leaders.
Singapore-based QCP Capital, an early investor in the dominant centralized cryptocurrency exchange Deribit and one of the largest leaders on the platform, now trades more than $ 1 billion in cryptocurrencies on DeFi platforms per month, according to Investment Officer chief Darius Sit.
QCP, which keeps a book worth more than $ 2 billion on stock exchanges, over-the-counter platforms and DeFi, recently traded $ 1 million options related to AAVE token with Ribbon Finance and $ 1 million MOON options on ThetaNuts Finance.
While these figures may sound miserable compared to a daily volume of $ 500 million or more in the market for bitcoin options on centralized exchanges, they are significant for relatively smaller coins such as AAVE and LUNA.
Options are traded at the AAVE price
AAVE is the 57th largest cryptocurrency with a market capitalization of $ 3.6 billion and a daily spot market volume of $ 250 million, according to CoinGecko. LUNA, the original coin of Terra’s blockchain, ranks 14th according to market estimates. Leading centralized exchanges such as Deribit do not offer optional contracts related to these coins.
“We bought AAVE calls at a strike price of $ 360 sold by Ribbon Finance on November 12,” Sit said. He also serves as an advisor to Ribbon Finance and ThetaNuts Finance.
AAVE is the source token of Aave’s decentralized lending protocol. The cryptocurrency traded close to $ 310 on November 12 and changed hands at close to $ 274 at the time of printing.
QCP also bought bitcoin and ether calls and ether routes through Ribbon Finance on November 12, generating an imaginary volume of over $ 200 million, Ribbon Finance co-founder Julian Koch said in a Telegram chat.
Covered Call, a bullish-neutral options trading strategy, involves selling out-of-money (OTM) call options – those with strike prices above the current spot price – in addition to owning the underlying asset. The call option gives the buyer the right, but not the obligation, to purchase the underlying property at a predetermined price on or before a certain date. The buyer on call is implicitly bullish in the market and pays a premium to the seller for providing protection against rising prices.
Ribbon Finance covers the call strategy
With Ribbon Finance, the covered call strategy is automated. Investors must deposit their AAVE in the vault, which takes care of other complexities such as selecting the appropriate level of strike to sell the weekly option.
The Treasury sells weekly AAVE call options against a 100% deposit every Friday at 11 a.m. Coordinated Universal Time in exchange for a premium (paid in AAVE) by customers, which mainly consist of market makers. The premium received represents the return on the strategy and is distributed to users in proportion to their deposits.
If the AAVE expires below the strike after which the call was sold, depositors retain the entire premium received. If the option expires in cash with AAVE settlement above the revocation, the buyer of the option can buy AAVE at the strike price, and depositors lose money.
DeFi options trading
Basically, the recently launched AAVE vault works similarly to Ribbon’s ETH and BTC call vault discussed in detail in September.
Structured products offered by Ribbon Finance and other protocols such as StakeDAO and ThetaNuts Finance that provide double-digit returns become increasingly popular as yields decline from the so-called Cash and Carry strategies.
“DeFi option vaults are key to the scalability of options and structured products on DeFi,” Sit from QCP told CoinDesk in a Telegram chat. “We see this as a real DeFi 2.0 wave.”
Ribbon Finance has registered a volume of more than $ 2 billion since the launch of the first treasury option in April, Koch said. ThetaNuts plans to launch optional vaults for BTC, ETH, ALGO, AVAX, LUNA, SPELL and several other cryptocurrencies on December 3, the protocol manager told CoinDesk in an interview with Telegram.