Until recently, options trading was reserved for centralized exchanges. While this reduces fees, a centralized exchange retains custody of your assets.This puts you at risk as a third party controls your assets, not you. A decentralized alternative is now available! This gives you full control and makes this article the best path.

How do options work?

Options give traders the opportunity to bet on the price direction of an asset. For example, if a trader believes the price of a cryptocurrency will rise, they can buy a call option. This gives you the right to purchase the asset at a specific price on the maturity date. And if they think the cryptocurrency is going to fall, they buy puts. Again, this gives you the right to sell the asset at a specific price on maturity.

Let's look at an example. If the price of ETH is $1700 and traders think it will go higher, they can buy a call option at $1800. If the price of ETH is $1900 on expiry date, the call option allows the trader to buy his ETH for $1800. You can then sell it at market price for $1900 and make a profit of $100 after deducting the commission.

Conversely, if the price of ETH is $1700 and the trader thinks the price will drop, he can buy a put option at $1600. If the price of ETH falls to $1500 on the expiry date, the trader can exercise the option and sell the ETH at $1600. The price is higher than the current market rate, allowing traders to make a profit of $100 before fees.

An option gives a trader the right to buy an asset at a specified price without any commitment. If these two hypothetical scenarios don't work for the trader, there is no need to buy ETH. However, traders always pay a commission for the options they buy.

Trading options have mainly happened on centralized exchanges. But this is now changing. 

Opyn

Opyn offers a product known as "Squeeth", which is a power perpetual (a perpetual derivative indexed to a power of the price of an underlying instrument) that tracks the price of ETH². In plain English, this means you can trade the price of ETH using leverage without liquidations or having to deal with expiry dates.

You can either go Long Squeeth (if you think the price of ETH will increase and if you're correct, you'll earn more than you would with 2x leverage) or Short Squeeth (if you think the price of ETH will decrease).

Alternatively, you can use their Crab Strategy (if you think that ETH will trade within a small range allowing you to earn yield).

Deri Protocol

Deri, your option, your future!

Deri Protocol is the DeFi way to trade derivatives: to hedge, to speculate, to arbitrage, all on chain. With Deri Protocol, trades are executed under AMM paradigm and positions are tokenized as NFTs, highly composable with other DeFi projects. Having provided an on-chain mechanism to exchange risk exposures precisely and capital-efficiently, Deri Protocol has minted one of the most important blocks of the DeFi infrastructure. Since its launch, Deri Protocol has gone through two major version iterations and has been supporting three major derivative types: Perpetual futures, Everlasting Options and Power Perpetuals. As of today, it has been deployed on multiple blockchain networks to serve traders’ hedging and speculating demands and processed a total trading volume of over 20 billion USD. Statistics show that Deri Protocol has become one of the most used DeFi derivative protocols per trading volume.

 DPMM of Everlasting Options

For everlasting options, the DPMM (Deri Proactive Market Making) mechanism is adopted to carry out trades. For each everlasting option, DPMM takes two inputs from the oracle: the underlying price and volatility. It calculates then the theoretical price (iii) for the option (refer to the whitepaper for the math of the pricing).

This theoretical price is used as the starting point of the DPMM pricing. When the net position is 0 (the equilibrium state), the option mark price equals the theoretical price

iii. Whenever there is a trade, it pushes the mark price toward the trading direction (i.e. a buying trade pushes the price up while a selling pushes it down). The price change due to the trade is proportional to the trade size.

Ribbon

Another platform on this list is Ribbon finance. Unlike Opyn and Hegic, Ribbon offers structured finance products like covered calls or put-selling in their vaults to generate yield for investors. 

Covered calls are where an investor thinks an asset they own will decrease in value, so they sell a call option against their asset to earn a premium. Whereas put-selling is when the investor thinks the price will increase, so they sell put options on their asset to earn a premium.

To use Ribbon, traders deposit their crypto into their chosen Ribbon vault, which will automatically run the intended trading strategy on their asset.