Decentralized finance (DeFi) protocol Compound saw its governance token, COMP, skyrocket in price when it launched last week. Now, decentralized options marketplace Opyn has launched put options on COMP that will provide a safety net of sorts by helping holders mitigate some of the risk should COMP’s fortunes take a turn for the worse in the next few days.
"We’re excited to launch @compoundfinance COMP put options! You can protect yourself if COMP falls to $150 or lower before July 3rd," Opyn's official handle tweeted early Friday. Several hours later, Universal Market Access (UMA) announced it is creating the ability to synthetically short COMP on its decentralized platform. Opyn closed on over $2 million in funding this past week.
A put option is a derivative contract that gives purchaser the right but not the obligation to sell the underlying instrument at a predetermined price on or before a specific date. Meanwhile, call options represent a right to buy, With options, traders can make bearish or bullish bets at various price levels called strikes that expire in different months.
Opyn is offering a put option on COMP at the strike price of $150, which will expire on July 3.
How it works
A put option with a $150 strike can be bought by paying a U.S. dollar-denominated premium, currently $3.76. In return, the purchaser will receive oTokens, which represent the right to sell COMP on or before expiry at $150. oTokens can be bought and sold on an exchange like Uniswap at any time before expiry.
Meanwhile, the option seller offering insurance will deposit 150 USDC, a dollar-backed stablecoin, as collateral to ensure there is no liquidation risk.
The put option on COMP is an American-styled option, meaning the buyer can exercise their right to sell COMP at $150 anytime before July 3. European options can be exercised only on expiry.
While exercising the put option, the purchaser will send oTokens back to Opyn along with COMP (because oToken is the "right to sell COMP at 150") and will receive 150 USDC in return.
As such, one could say the put option essentially represents the right to sell COMP and buy USDC.
In such an instance, the max loss for the buyer is the premium paid, which is the maximum money the seller can make. “Keep the entirety of your premium as well as your collateral as long as the asset stays above the strike price until expiry,” Opyn tweeted.
Even if COMP’s price drops to single digits or even zero, the holder of the put option would still be able to sell COMP at $150.
“Opyn’s put option can be used by traders who do not hold COMP but want to speculate on the DeFi token,” Anton Cheng, developer at Opyn.
A trader with a bearish view on COMP can just buy put options at the available strike price of $150. If COMP drops, the oTokens will appreciate in value and traders can sell them on Uniswap.
At press time, COMP is trading at $250, according to Opyn.co. The governance token went live for trading on June 18 and traded near $80 on the first day. In the following three days, its price surged by 500% to $380, triggering a frenzy in the DeFi space.
Such strong rallies are often followed by sudden price pullbacks. Savvy investors, therefore, may buy the newly launched put option on COMP to cap downside risks.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.