Author: 0xbeiu
Compiled by: Vernacular Blockchain
I still remember the early days of Hyperliquid.
It was a grand idea, but not enough people believed in it at first. Looking at us now, everyone is either a perpetual contract DEX (Perp DEX) trader, an ordinary user, or an airdrop farmer.
But what if I told you that there is a niche market similar to Perp DEX that is destined to eat into Perp DEX’s market share, and again – not many people are paying attention to it.
Imagine being a veteran Perp DEX user before the advent of TGE and airdrops that brought generational wealth like Hyperliquid, Lighter, or even the reminiscent dYdX…
And this is exactly the advantage you can take with options (OPTIONS). I firmly believe that DeFi options trading will capture an increasing share of the market in the coming years. This article will explain in depth why I hold this view and how we can plan ahead.
What are options? why it matters
If you are already an experienced options trader, you can skip this section to avoid getting bored.
But if you're a newbie, this is probably the best place to start.
Options are contracts that allow you to bet on the price of an asset within a specific time period (similar to a perpetual contract).
Unlike perpetual contracts, options have an expiration date - which is when your options will have actual value or become worthless.
With options, you can bet in two directions:
Call options (Call / long) → benefit from rising asset prices
Put options (Put/Short) → benefit from falling asset prices
What exactly do options look like?
At the time of writing, $HYPE is trading at $94. I bought a call option today expiring on October 2 with a strike price of $97.50.
what does that mean?
Meaning if $HYPE reaches $97.50 before October 2nd, I will gain the right to purchase $HYPE at $97.50.
So, why pay for the right to buy at $97.50 (and even pay an extra premium) when the market price is now $94 and I can just buy spot?
Because what I bought was not the chance to get cheaper HYPE today. What I purchased was asymmetric exposure (Asymmetric Exposure) to the future trend of HYPE without having to fully advance the principal required to own HYPE.
In short, options, like perpetual contracts, are leveraged instruments. The underlying rules are different, but the core function of amplifying capital exposure is the same.
Options vs Perpetual Contracts vs Spots
Each of these three has its own suitable trading scenarios. Unless you are extremely experienced, you should not blindly take a heavy position in options and perpetual contracts during periods of high volatility.
Likewise, when the market is improving and you are confident about future trends, you naturally want to gain greater exposure beyond the underlying spot returns.
So you can be involved in all three areas at the same time.
Core differences:
Options will not be liquidated and will never be reset to zero due to a malicious pin like perpetual contracts.
On the other hand, you could lose all the premium you spent on the option and walk away with nothing.
Let’s go back to the $HYPE call option case and do some specific data calculations:
HYPE is on sale for $94. My call options have a strike price of $97.50 and an expiration date of October 2 (period 10 days).
If I buy spot at $94 and then HYPE only goes up to $97, I make a profit of 2%.
Buying options in the same market: Even though I was on the right track, since $97.50 was not reached before expiration, I would have lost all my principal invested in the option.
Assume that my position size is 14 HYPE contracts:
Buy 14 HYPE spot: 14 × $94 = $1,316 - I need a principal of $1,316.
Buy 14 HYPE call options exposure: 14 × $3.42 ≈ $47.88.
Now assume HYPE reaches $120 at expiration:
My spot income of 14 HYPEs: 14 × ($120 − $94) = +$364
Earned $364 on $1,316 = +27.7%.
My $97.50 call return: $120 − $97.50 = $22.50 per HYPE
14 HYPE: $22.50 × 14 = $315
I previously paid about $47.88. So the actual net profit is $315 − $47.88 = approximately $267.
That’s a whopping return of about +558% on an initial capital of about $48.
As mentioned before, options are leverage that has an expiration date and will not be liquidated by a short-term price spike.
The advantage of the perpetual contract is that it can play a greater role when you have a high degree of confidence in the direction of the rise and fall, but cannot accurately determine the time and fermentation cycle.
Opportunities vs Traps
Options can be confusing in the early stages. You may be in the right direction and still lose money.
You may even hit the call/put strike price and still end up with a negative profit and loss (PNL).
So how to seize opportunities and avoid traps?
To do this we must have a deep understanding of the core concepts and key terms of options:
Premium: The unit price you pay to purchase the option (multiplied by the number of shares purchased/contract quantity)
Strike: The price level at which the option is anchored. At expiration, a call option has intrinsic value only if the asset price is above the strike price
Breakeven point (Breakeven): roughly equal to the exercise price + premium. Only when the asset reaches that price can you recover your costs and start making profits.
Bid/Ask/Mark (Bid/Ask/Mark): Similar to traditional perpetual contract order book
Bid price (Bid) = the highest price at which others are willing to purchase the option from you in the current market
Ask = the lowest price at which others are willing to sell the option to you in the current market
Mark price (Mark) = the fair reference value of options currently calculated by the platform
The options platform will directly display these values, so there is no need to be overly anxious at the moment, but these are core concepts that must be mastered before establishing a position.
Although there are more complex advanced models, for the sake of ease of reading in this article, we try to analyze them as briefly as possible.
Take call options (long) as an example
If you look closely, you'll notice that options that are closer to an asset's current price are more expensive. The ask price (ASK, the price you pay for each share) is high because it has a higher probability of being triggered.
What about out-of-the-money options that are far from the current price? Although the purchase cost is low, the probability of successful contact is extremely small.
There is also time value loss (Time Decay).
Options are subject to time decay. Even if the direction is correct, if the time is too long, the option will depreciate significantly.
So in general:
A quick pull = extremely positive for the call option buyer.
The same amount of increases but happening much later = may still be profitable, but profits are significantly eroded by time loss.
Starting the surge after expiration = meaningless, directly returning to zero.
This requires certain practical operations and investment of real money to understand various doorways. Therefore, I strongly recommend using a very small amount of money to test the waters in the early stage to familiarize yourself with the gameplay techniques.
I am far from an expert, and I have only delved into it recently, but I firmly believe that this track is of great value for in-depth exploration.
Investment logic and mainstream protocols
I still clearly remember watching @AltcoinPsycho’s YouTube video a few years ago, and he was extremely bullish on the options track at the time.
Although the outbreak of this track came later than expected, we have already witnessed a strong recovery in DeFi options recently.
Even so, the volume of on-chain options currently accounts for only about 5.5% of the trading volume of the absolute dominant Deribit, which is a centralized trading platform.
@deriveXYZ is the current leader on the chain - they just achieved the highest single-week transaction volume in history.
What is very intriguing is that the token price trend has formed a perfect resonance with the percentage growth of the protocol revenue - both indicators have increased by more than 95%.
This has driven $DRV Token’s extremely strong recent moves,
Its token has gone from a low of $0.10 to a high of $0.57.
I’ve shared my Derive investment logic before and made my buying history public, but haven’t gone far enough into the platform itself.
All screenshots and cases in this article are from Derive’s operation interface.
Frankly speaking, the interface is extremely unfriendly to novices, and many people hold the same view.
The screenshot shared by @JoestarCrypto is indeed daunting at first glance. The UI interface needs to be greatly simplified in order to lower the threshold and stimulate new users' desire to explore.
Therefore, there is huge room for optimization and improvement.
The Derive team attempts to lower the barrier of entry and abstract the underlying complexity by launching the "Strategy Builder".
Here's a short video by @derivativemonky demonstrating the logic of how it works:
Like all tracks, healthy competition often leads to better product forms. I think Derive's competitors are poised to take off.
The mobile application @dreaming has been launched, others such as @SkewTrade are in internal testing, and some are even speculating that Hyperliquid is also developing an options section internally.
@dreaming has carried out a lot of abstract encapsulation and created a very refreshing UI on the mobile terminal. However, its official launch has been suspended for more months, and subsequent progress still needs to be continuously observed.
However, they have launched a points system for trading crypto assets and options, which is currently little known.
Get the App experience link: dos.app/r/beiu
But there is a core knot in this competitive landscape:
Building an options trading protocol is completely different from developing a Perp DEX. The technical difficulty is much higher and the depth of liquidity is extremely demanding.
This reply from @muir_eth provides a very insightful breakdown of why options are more challenging, why liquidity is the ultimate moat, and why not everyone can get involved:
I believe that a large number of options applications will emerge in the future, but in the end only few will survive the long run.
But there’s no doubt there’s room for growth here. Even looking at Derive's existing crypto options market, the underlying types are still very limited.
If I were to speculate, this is entirely subject to the high threshold of the liquidity moat.
Just imagine, if in the future we can access more market targets, tokenized US stocks, traditional stocks, and niche targets where traders from all walks of life have unique information advantages,
This will surely promote the real large-scale popularity and explosion of this derivative product.