To an average user, options might seem complex, led by complex concepts including strikes, expiries, combinations, and more for active trading. However, options are an established form of derivatives in the conventional money markets, widely used to hedge against price fluctuations to settle at a predetermined expiration date in the future. Unlike futures contracts, options do entitle the holder to the right without any obligation to exercise the contract.
Options are being used in traditional finance for hedging, leverage, and yields. Users buy put options to hedge downside risk, while call options are used to gain leverage without incurring any liquidation risks. And traders often sell put or call options to earn higher yields.
In volatile conditions or bearish conditions, the average market participant in DeFi incurs risk - sharp decline in collaterals, capital liquidation, slippage, price impact, impermanent loss! Understanding and protecting their assets from the associated risk is an extremely steep learning curve for new users. Opportunities remain reserved for the DEGENs and OGs who have amassed great technical knowledge and are able to mitigate the risk factors manually. This leaves the average user from deriving the benefits of such strategies and if they do, due to insufficient technical dexterity, getting rekt becomes a very sublime fear.
The mainstream DeFi users do not truly understand the degree of risk and leverage being applied to their asset supply. This puts a dramatically large chunk of capital at the risk of liquidation, should the price of collateral diminishes, creating optimal conditions for price movements. For the DeFi normie, this is a sub-optimal setting. However, for a trader, this creates vital opportunities.
At the same time, very few recognize this market trend. In the absence of an order book and ratio of open long and short positions - there is no way to create predictions on market corrections that are being developed in real-time.
From another perspective, DeFi is evolving at a rapid pace, with new concepts and strategies being introduced every day. The new influx of products is creating a marketplace where users no longer just use spot leverage but also their own asset supply. Meaning, the market itself is moving and shifting to adapt to the new trends.
Due to the fast-moving market, metrics that DeFi traders leverage today might not even be reliable in the long run. Trading volume and transactions on protocols continue to grow every day. Profits, leveraged positions, liquidation factors, etc. are no longer limited to CEXs.
Asset flows no longer offer a holistic perspective of the buying and selling pressure. This will eventually push traders to employ tools that can handle trading volumes on DEX, liquidation rates birthed by DeFi smart contracts.
Options allow traders to capitalize on this volatility by ensuring that they are not knocked out of reasonably open positions. This is an easy way to increase the chances of a successful trade.
However, options can be useful not only for traders. Crypto investors exploring the possibilities of DeFi should also consider using options to hedge their risks.
This small scenario illustrates the importance of risk management in DeFi.
In order to leverage the full potential of options and avoid cost inefficiency, the market needs a protocol that automates and derives option-based innovations for the mainstream participants.