Options are a valuable and desired tool in a trader’s arsenal, which is why Siren has implemented them in a DeFi environment. Traders can use options to profit regardless of market movement, incorporating additional consideration and belief into their positions.
Broadly, Siren options provide utility in the following ways:
Options can be used as a hedge against a long-position on the underlying asset.
“I believe ETH will eventually reach a much higher valuation, but I’ve also experienced severe dips in the market for a wide variety of reasons (tweets, regulations, breaches) and would like to protect myself against that.”
Rather than simply holding ETH and gritting their teeth through downturns (or attempting to time the market and catch a falling knife), the trader having the above thought could also purchase puts on ETH to turn a possible downturn into an opportunity for profit while holding onto their ETH position. They’ve translated their past experiences into a more resilient and nuanced portfolio and greater peace of mind.
Because options expire, they can be used to speculate on the underlying asset for profit. The buyer of an ETH call is making a bet not just that ETH will appreciate, but also picks a certain date.
“I believe ETH will appreciate, I believe a certain event A will cause ETH to appreciate to B price level by C date, and I would like to use that added factor of timing for greater profit.”
Options allow buyers to incorporate “when” as a factor into their position and seek greater speculative return within that time frame without holding ETH directly (a lower upfront cost of a premium versus purchasing the asset). Options here enable punchier bets and more strategic financial constructions.
Options cost an upfront premium to buyers, and options writers collect that premium. Writers hope for the option to expire worthless (entire premium is profit) or to at least earn more from the premium than the eventual option payoff (option expires ITM).
“I believe ETH’s price will stagnate in the coming months because of X consideration. In order to profit off this while holding ETH, I will write call options and collect premiums in the meantime.”
Options allow writers to profit off such sideways movement, a position that could not be replicated through simply interacting with the underlying asset in a binary buy/sell paradigm.
The above use cases are valid examples, but not exhaustive.
Additionally, the writer’s use case is missing additional context of how Siren’s DeFi implementation transforms the role of writers in the protocol. An option writer’s role is transformed from the traditional active management into a passively indexed position that is largely handled by the Siren Automated Market Maker.
NOTE: This is a living document that will continue to be updated as Siren evolves. To contribute, please visitSiren on GitHub. Specific questions may be answered and technical guidance may also be provided from time to time in theSiren Discordto those who are interested in building on top of the protocol.