Investing idea at consolidation: difference and edge between Options and Farming.

General overview

Options are a complex, yet versatile tool that can be used to solve a wide range of issues. In one of our blog entries, we have already given a comparison of trading an asset on the spot market and trading with options. The analysis showed a clear advantage of options when it comes to the use of leverage. In this post we would like to compare the overall efficiency of the capital utilization by means of options and by means of alternative ways of liquidity provision (farming) based on the example of an investment idea in the current market circumstances.

In terms of strategically long-term — “trend” investing, at such a moment, capital is looking for alternative opportunities for profit. Within the crypto market, this is lending liquidity to various decentralized lending protocols or decentralized exchanges. The terms of such placement vary greatly depending on the platform and the amount of risk. If the capital is denominated in Stable Coins or crypto market majors, peer-to-peer investing refers to returns of 3 to 15% per annum. Peer-to-peer investing should be understood as placement of funds on one platform only, without participation in liquidity incentive programs or additional cross project initiatives.

For example, the rate at which you can place Stable Coins USDC or DAI on major lending platforms such as AAVE or COMP is no more than 4% per annum.

Platforms with automated investments using various cross-platform solutions, such as yearn.finance or Сonvex offer higher returns of about 24% by allocating assets among a pool of three tokens — USDT, wBTC and ETH, but significantly increase the risks.

Alternative: Volatility trading = options trading.

After the historical market decline on May 19 and the consequent stabilization of the BTC price in the 30 000–40 000 corridor, the overall volatility began to decline, and the market has entered the consolidation phase. Consolidation is a situation on the market, when the price is within a certain range for a long period of time (for more than a month and a half at the present moment).An additional factor that influenced the strength of the price movement for crypto assets was the summer vacation season — the time when most employees in the Northern Hemisphere traditionally take a vacation. This also applies to employees of funds and investment banks.

The options market reflects bidders’ expectations of future price movements and has a certain calendar cyclicality. Thus, the main trading volume takes place on the last week of the month, on the last month of the quarter, half-year or a year.

At the moment the situation with BTC options with expiration date of July 30 is as follows*:

At the current price of 32 700 per 1 BTC

Selling a PUT option at 25 000 offers a premium of about $240 in 15 days, which equals an annual return of 22.3%.

If you change the strike date to a shorter one, for example July 23, then selling a PUT option with a strike price of 28 000 could yield $235, which corresponds to an annual return of 38.2%.

The situation with the BNB** token options is more curious:

Selling an option with an exercise date of July 30 and a strike price of $220 (down 10% from the minimum price after the May 19 decline) allows you to expect a reward of $6.9, which at the current price of $310 corresponds to a 54% annualized return. This does not take into account the use of collateral in Incentive program***.

Summary

The purpose of this investment idea is to show that there are different ways of using capital in the market. Some of them are obvious and simple — for example, buying an asset on the spot market. Others require some experience and a minimum of math — farming or options trading. Regardless of your personal choice, delta.theta’s goal is to provide traders with the most effective tools for trading and investing.

Options also have a number of strategic advantages:

  • Fixed yield (most farming projects have flexible rates depending on the number of incentive tokens/the duration of the program/the number of funds raised)
  • Control of funds (within the delta.theta platform — funds are blocked in the smart contract, not in the internal accounts of an exchange or project)
  • Freedom to choose the beginning and duration of the transaction (unlike many liquidity raising programs, where attractive rates of return are valid for a limited period of time)
  • Low commissions (trade commission for a transaction is fixed, does not vary from amount, has no risk of slippage when using AMM model, there is no fee for using cross-platform algorithms like yearn.finance)
  • no impermanent loss risk while using AMM

Note

*- information from the Derebit exchange as the most liquid marketplace at the time of writing the article was used.

**- the data from delta.theta terminal was used to determine the TVL value of the option, as a benchmark, due to the lack of alternatives on the market at the time of writing.

***- a liquidity incentive program that allows placing collateral for trades on the delta.theta platform in Compound\Venus smartcontract vaults for an additional yield of about 3.5% at the time of writing.

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delta.theta

delta.theta

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P2P options trading platform on Binance Smart Chain, Ethereum