Solana options and futures have arrived on Deribit. These contracts use SOL, the native token of the Solana network, as collateral for trading both options and futures. This allows traders to speculate on the dollar price of SOL using their SOL as collateral. But it’s not just speculators who will find these contracts useful. They are also useful for hedgers and yield seeking individuals or companies.
For those new to options, it may be useful to give a brief overview of the two main types, namely calls options and put options.
A call option gives the holder the option to purchase the underlying asset (for example SOL), at a fixed price before the option expires. If the underlying price is above the strike price of the call option at expiry, the option will have some value.
This is what the basic payoff of a call option looks like if we hold it until it expires. The profit/loss is in dollars here. In this example it’s a call option that costs $5 and has a strike price of $100.
A put option gives the holder the option to sell the underlying asset at a fixed price before the option expires. If the underlying price is below the strike price of the put option at expiry, the option will have some value.
This is what the basic payoff of a put option looks like if we hold it until it expires. The profit/loss is in dollars here. In this example it’s a put option that costs $5 and has a strike price of $100.
In both cases the buyer of the option has a choice whether to use the option they have purchased, but they are not obliged to. This of course is a valuable right to hold, so option buyers have to pay for this by paying a premium up front. Option buyers have a fixed risk, but unlimited potential profit.
Let’s take a look at a couple of ways people could benefit by using options.
Hedging spot by buying puts
Firstly, imagine we already own some SOL, let’s say 100 SOL that we purchased at a price of $100 each. This is what our profit/loss looks like when we are just holding the 100 SOL.
Imagine we are bullish on SOL long term but are concerned there may be a decrease in the price in the short term. We don’t want to sell our spot holdings because we still want to participate in any price increases, but we want some sort of protection in case prices do move down. Buying put options fits this need well.
If we purchase 100 SOL put options with a strike price of $90 for $5 each, we transform our profit/loss into this.
Buying puts means that if the price of SOL decreases below the strike price of the puts, we still have the right to sell the SOL at the $90 strike price of the option. Or in the case of cash settled options, we will simply receive the difference between the strike price and the underlying price at expiry. This property caps our losses when the underlying price of SOL drops below the $90 strike price, while still allowing us to benefit from further increases in price.
Eagle eyed readers will have noticed that this payoff looks remarkably similar to that of buying a call option. Indeed buying a call option with no position in the underlying, is equivalent to holding the underlying and buying a put option.
Which strikes and expirations to choose are up to the individual. The choice will depend on their views on the market, risk tolerance, current option prices, and how much protection they wish to purchase.
Generating yield by selling calls
Another way someone may choose to use options to their advantage, is to generate a form of yield by selling call options against their spot holdings. Deribit is a marketplace where any trader is free to buy or sell options, so even smaller traders are not limited to long only strategies.
Imagine again that we already hold 100 SOL with a cost basis of $100. Again, this is what our profit/loss looks like when we are just holding the 100 SOL.
Imagine that rather than simply hold the SOL, we would like to generate some form of yield on our holdings. If we sell 100 SOL call options with a strike price of $110 for $5 each, we collect a credit of $500, and transform our profit/loss into this.
The $500 credit is ours to keep, and this is our yield. We still have risk to the downside, but our cost basis has moved down from $100 to $95. The catch is that if the price of SOL is over $110 at expiry, we do not benefit from any of the additional gains beyond this level.
When selling calls for yield, it is always a trade off between leaving room to benefit from more upside, and collecting more premium for the calls. We also need to bear in mind that the yield here is not risk free. We are being compensated for the risk of missing out on further upside.
This strategy of selling a call while holding the underlying, is often referred to as a covered call. It is a common strategy employed by Defi Option Vaults (DOVs). These are on chain services that systematically sell call options against the depositors assets. The premium collected for the calls generates a yield for the depositors, but this of course comes with the same risk when prices increase beyond the strike price of the sold options.
DOVs have the advantage of being very simple and passive for the depositors. However, by executing this strategy manually on an exchange, we do gain the choice of when and what strikes to sell, and we may be able to achieve better prices and timing as a result.
Cash and carry trades
Even if we don’t already hold SOL, we can still use the inverse futures to earn a dollar yield by using the SOL futures. To do this we can purchase SOL, then use this SOL as collateral to short the dated futures. In doing so we are able to capture the difference between the price we pay for the SOL and the futures price (which will usually be higher).
For more information on cash and carry trades, we have a lesson on them here.
We’ve kept everything in dollar values here to keep things as simple as possible to understand, however the SOL options on Deribit are actually inverse contracts. This is not as complicated as it sounds. It just means the profits and losses are paid in SOL itself rather than dollars. There is a quick article that explains inverse futures here.
Additionally, if you really want to dig into the details of inverse options, we have a whole course on options with videos, articles, and quizzes. You can find the course here. And you can also find the videos in playlists on Deribit’s youtube channel here.