Partnered With:

Hegic: Hedging DeFi market with options

Read this article in 15 Minutes

Hegic is a decentralized point-to-point option protocol that cryptoasset holders can use to create new investment strategies and manage their cryptographic risks to optimize their risk/reward profile.

Original title: "The Hidden Trillion-dollar Market in DeFi, a Play on DeFi Options Product Hegic"

Source: Babbitt

Over the past few years, DeFi has greatly improved the flexibility and potential strategy of any cryptocurrency investor. The introduction of decentralised exchanges, decentralised lending, automated money management strategies, synthetic assets and income farming all create new tools that traders can use as part of their strategies.

Here are some ways to leverage ETH and BTC options to your advantage.

Goal: Learn how to trade ETH and WBTC options on Hegic

Skills: Elementary/Intermediate

Low difficulty:

Return on investment: depends on market/strategy

An important financial primitive

Options contracts began trading in traditional capital markets around 1973 to provide investors with other tools to hedge their market risks or develop new investment strategies not available in the physical market.

Although DeFi has become hugely popular in traditional capital markets, it has largely failed to establish a vibrant options market in spite of the interest and growth in asset classes.

Hegic relaunched in October with an innovative new design: the two-way option liquidity Pool. Since its launch less than two months ago, these pools (ETH and WBTC) have attracted more than $80 million, giving traders considerable depth in option liquidity.

What is an option?

An option is a financial instrument that provides the user with exposure to the underlying asset price while limiting their downside exposure. Hegic offers buyers the chance to buy long (call options) or short (put options) on WBTC or ETH.

Options novices can take a look:

Put options represent the right (but not the obligation) to sell an asset at a predetermined price over a specified period of time. This gives you "short" exposure, just as the price of the underlying asset has fallen, and you reserve the right to sell the asset at a higher price (called the strike price) and make a profit.

Call options represent the holder's right (but not obligation) to buy an asset at a predetermined price within a specified period of time. This gives you "long" exposure, as if the price of the underlying asset were going up, and you reserve the right to buy the asset at a lower price and make a profit.

"Hegic options are settled in cash, which means they only pay above/below the call/put strike price. In other words, if the trade is successful, the user does not need capital to buy [the call] or sell [the put] underlying asset."

What can you do with an option?

Options offer DeFi investors and traders many opportunities and investment strategies:

Owning a lot of ETH and wanting to hedge against ETH fluctuations?

You can buy put options for the downside risk of capital effectiveness.

Want to protect your Maker CDP or Aave Health Factor from the risk of liquidation?

Consider buying a put option, which becomes profitable if the market falls.

Want to use stabilizers for liquidity mining without reducing your long cryptocurrency exposure?

You can sell your crypto assets and use the remaining 5-10% to buy a call option, which gives you a 28-day long exposure.

Want to mine on Uniswap or Sushiswap using ETH or WBTC stabiliser pairs, but worried about volatile loss (IL)?

If the ETH/WBTC price falls, buy a put option to protect you against IL. Or buy call options to prevent rising prices from reducing the value of unstable currency assets. You can even buy both products at the same time, just in case (known as straddling arbitrage).

Two-way liquidity pool

Perhaps the most innovative and experimental aspect of Hegic is its two-way liquidity pool for ETH and WBTC. The ETH pool and the WBTC pool act as liquidity and the buyer can purchase BOTH call/put options of any size (as long as liquidity is available) at any strike price for five terms (1, 7, 14, 21, 28).

This design overcomes the problem of liquidity dispersion encountered when fixed thin option agreements distribute liquidity among multiple strike prices, put and call contracts, and expiration dates.

For example, the order book options platform might allow you to sell a 10-day ETH put option at $500 exercise over a 7-day period, but the buyer who wants to buy a 5ETH call option at $650 exercise over a 14-day period cannot do so based on my position/liquidity.

With this in mind, Hegic's design overcomes this capital efficiency problem and has accumulated more than $80m over the past seven weeks.

Hegic's local scrip (Hegic) represents ownership of all fees earned under the agreement.

Under the current parameters, all ETH options purchased generate a 1% fee (paid by ETH), which is equally allocated to ETH Staking Lots. Similarly, the WBTC fee resulting from the WBTC option is 1%, which is equally allocated to WBTC Staking Lots.

Since its launch in October, Hegic has cumulatively paid more than $1 million to ETH and WBTC pool pledges.

To get a Staking Lot and earn a portion of the agreement fee, users need to purchase 888,000 HEGIC. However, there are currently two types of real-time Staking pool services that allow users less than 888,000 HEGIC to participate in taking a share of the agreement fee. These solutions are HegicStaking and zLOT.

"Gone forever is already testing the HEGIC Vault strategy and waiting for v2 Vault to launch."

How do I buy put and call options on Hegic

1. Install

Go to the Hegic website, connect your wallet and navigate to the holders TAB. Hegic currently supports Metamask, WalletConnect, Authereum and a few other Ethereum wallets!

After you connect your wallet and open the "Holders" page, scroll down to the "Buy Option Contracts in one Minute" section and select the underlying asset to trade. This could be ETH or BTC options!

2. Design your custom options to best suit your cryptocurrency trading strategy

Select the type of option you want to enter. It could be a put or a call.

Select the size of the option represented in the underlying asset (ETH or WBTC).

Select the strike price that you want the option to have. The default strike price is set to the current Chainlink forecast price of the underlying asset.

Choose the duration you want the option to have: 1, 7, 14, 21, or 28 days.

The price of your option will be shown in dollars, as shown in the yellow box below. You will also notice that the strike price and option break-even are displayed on the dynamic chart through the user interface.

3. Buy your options

Below the charting tool, you will notice a text box with ETH representing the cost of options. All options are paid in ETH regardless of the underlying asset. You must ensure that you have this amount of ETH in your wallet in order to process trades and buy options.

When you are ready, click the Buy Option Contract button and approve the transaction.

Once confirmed on the chain, you are now the owner of the first Hegic option contract!

4. Watch progress and exercise your options

To see the contract in action, you may have to refresh your browser first. You can view the contract at the top of the Holders TAB under Your Option Contract.

If the current price of the asset is in the currency, you will be able to exercise the value of the call option here. This could mean that it is above the strike price of the call or below the strike price of the put! If the value of the option exceeds the cost of the option, you will only "break even".

In order to realize the proceeds, you must exercise the option contract before the expiration date. If they expire in currency or profit, you lose nothing and miss the opportunity to gain value.

There is no secondary market for traded options contracts. But coming soon!

Bonus: Earn rHEGIC

As an early participant in Hegic, the option buyer will be rewarded in the form of rHEGIC, a coinage asset that Hegic will convert 1:1 at a later date. The current estimate is said to be some time in 2021, but stay tuned for more information.

The amount of rHEGIC depends on the size and duration of your options. Users can receive rHEGIC on the scrip Holder TAB under Liquidity Use Reward.

conclusion

The DeFi ecosystem is just beginning to see the growth of a more powerful options market. But this is early in the game.

With Hegic, you can currently only buy and exercise options. A secondary market for trading existing options is still being developed. In any case, given the trillions of dollars traded in the options market in traditional finance, the DeFi options market has a long way to go.

After all, Hegic just started on the main network!