What is Opyn?
Opyn is a capital-efficient DeFi options trading protocol that allows users to buy, sell, and create Ethereum-based options. DeFi users and products rely on Opyn’s smart contracts and interface to hedge themselves against DeFi risks or take speculative positions on different cryptocurrencies. Opyn uses 0x’s unique off-chain relay, on-chain settlement architecture, to offer free limit orders to its users.
- Options are derivatives contracts that give the buyer the right, but not the obligation, to buy or sell a fixed amount of an underlying asset at a fixed price on a specific date (for European options).
- People use options primarily for income generation, speculation, and hedging:
» DeFi traders use options as a risk-hedging tool (i.e., limits downside losses on declining asset prices).
» Speculators use options to gain low-cost, leveraged directional exposure with limited downside risk.
» Income seekers use options for recurring yield/income generation.
- Options are different from other derivative contracts (forwards, futures, etc.) in that with any options trade, the holder has the right, but not the obligation, to exercise their contract.
How users benefit from Opyn’s integration with 0x
Opyn users benefit from 0x protocol’s unique off-chain relay, on-chain settlement architecture, which makes free limit orders possible.
Placing limit orders is free on Opyn.co due to the following reasons:
- Limit orders are created and submitted off-chain to 0x Mesh, which broadcasts limit orders across the entire 0x network to be filled. This does not require any Ethereum gas.
- When limit orders fill, the transaction settles on-chain, and the taker of the order pays for the transaction’s Ethereum gas fee + 0x protocol fee.
Users on Opyn can set limit orders to expire in any duration, be it 30 seconds, 10 minutes, 24 hours, three days, one week, and so on. Users can cancel a limit order at any time, though canceling orders will require users to pay a small amount of ETH to cover the cancellation transaction’s gas fee. Orders with set expiration times will automatically cancel at no cost.
For more information on how to trade limit orders on Opyn.co, check out this step-by-step tutorial.
Options trading scenario examples using limit orders
By using limit orders, traders can specify a set price where they are willing to buy or sell options rather than buying or selling based on current market prices. If the asset does not reach the specified price, the order will not be filled. Below are two scenarios when it might make sense to trade options + use a limit order.
- Put option: a financial contract that gives the option buyer the right, but not the obligation
- Call option: a financial contract that gives the option buyer the right, but not the obligation, to buy an asset at a specified price for a specific amount of time
Scenario 1: Protective put (risk-reduction strategy)
Alexis wants to protect her ETH investment against a downturn in the market.
Alexis holds 10 ETH that she purchased in October for $1,000 each. Alexis wants to protect herself against ETH dropping before December 31st. To reduce her downside risk exposure, Alexis can buy a protective put option with a strike price she’s willing to accept for selling ETH (e.g., $900). The protective put sets a floor price of $900, below which Alexis will not continue to lose any additional money, even if ETH’s price continues to fall until the option’s expiration date (December 31st).
To buy a protective put option, Alexis must pay a premium (the option’s price). The premium for ETH Dec 31 900 puts is currently $10 on 0x, but Alexis doesn’t want to pay more than $9. Alexis can place a limit order for $9, and if the market moves in her direction, the order will be filled, and she will not have to pay the transaction’s Ethereum gas fee + 0x protocol fee. After placing the $9 limit order, the price of ETH moves in her direction, and her limit order fills for $9.
Throughout December, the price of ETH falls sharply to $500 and continues to trade at that level until December 31st. Since Alexis purchased a put option with the strike price of $900, she has the right to sell her 10 ETH to the put seller for $900, despite ETH trading at $500.
Hedging with put options allows individuals to reduce risk at a reasonable cost. Think of buying a put as an insurance policy, limiting your downside risk. Long puts can be used to insure your investments against a downturn. To buy this insurance, the buyer of the options needs to pay some amount of premium upfront. In exchange for this premium, the buyer of the options limits his/her downside risk and cost-effectively enjoys all the upside. By placing a limit order with Opyn on 0x, the seller does not have to pay any Ethereum gas fees or 0x protocol fees for the transaction since the taker of the order pays the fees.
Scenario 2: Covered call (income generation)
Mike wants to earn additional income on a portion of his ETH holdings.
Mike holds 10 ETH that he purchased in October for $500 each. Mike is looking for a way to generate additional income. Mike predicts the price of ETH will remain relatively flat or drop until December 31. To earn additional income, Mike can sell a covered call with a strike price that is out of the money (e.g., $600). In this example, a covered call is constructed by holding 10 ETH and then selling (writing) call options on those 10 ETH. The call option gives the call buyer the right to purchase ETH at a given strike price (e.g., $600) at a set time in the future (expiration date).
To sell a covered call option, Mike can lock up his collateral (10 ETH) to earn a premium (the option’s price). The premium for ETH December 31 600 calls is currently $10 on 0x, but Mike doesn’t want to accept less than $11. Mike can place a sell limit order for $11, and if the market moves in his direction, the order will be filled, and he will not have to pay the transaction’s execution Ethereum gas fee + 0x protocol fee. After placing the $11 sell limit order, the price of ETH moves in his direction, and his limit order fills for $11.
1. ETH never reaches the strike price within the stated period and the call is never assigned. If this happens, there is appreciation in ETH, and Mike gets to keep any unrealized profit from ETH’s growth and the premium as additional income.
2. ETH reaches the strike price ($600) at the expiration date. The call is assigned, requiring Mike to relinquish the difference between the strike price and the spot price in ETH to the call option holder. Mike keeps the appreciation from the higher stock price (ETH from $500 to $600) and the premium as additional income ($110) but must relinquish the difference between the strike price and the spot price in ETH.
3. The price of ETH falls. Mike keeps the ETH, and the unrealized loss incurs. However, Mike also keeps the premium ($110), mitigating the loss’s impact. Notice that the breakeven point occurs at $489, which is the difference between the ETH purchase price ($500) and the loss that offsets the premium earned ($110), or $11 per option.
On December 25, the price of ETH falls to $450 and continues to trade at that level until December 31. Since Mike sold a covered call with the strike price of $600, the call option will expire worthless (out of the money), allowing Mike to keep 100% of the option’s premium (the option’s price).
Selling covered call options can generate income from options premiums hoping the option expires worthless. Selling calls against assets you own (known as a covered call) is a widely used income-generating strategy. A call option is out-of-the-money when the underlying asset price is below the strike price. The options writer (seller) keeps the premium as profit. By placing a limit order with Opyn on 0x, the seller does not have to pay any Ethereum gas fees or 0x protocol fees for the transaction since the taker of the order pays the fees. (Note: Opyn users must lock up collateral for sell limit orders, which does require a gas fee.)