Crypto Options Traders Turn to DeFi for Altcoin Bets as QCP Slings $1B

The Singapore-based firm QCP now trades more than $1B of crypto options per month using decentralized financial applications, including $1 million worth of AAVE options recently with Ribbon Finance.

AccessTimeIconNov 23, 2021 at 6:25 p.m. UTC
Updated May 11, 2023 at 6:43 p.m. UTC
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Decentralized finance (DeFi) is fast becoming a preferred avenue to hedge smaller cryptocurrencies beyond bitcoin (BTC) and ether (ETH) as leading centralized derivative exchanges like the Chicago Mercantile Exchange and Deribit remain fixated on the two market leaders.

Singapore-based QCP Capital, an early investor in the dominant centralized crypto options exchange Deribit and one of the top volume leaders on the platform, is now trading more than $1 billion worth of crypto options on DeFi platforms per month, according to the firm’s chief investment officer, Darius Sit.

QCP, which runs a book in excess of $2 billion across exchanges, over-the-counter platforms and DeFi, recently traded $1 million worth of options tied to the AAVE token with Ribbon Finance and $1 million in LUNA options on ThetaNuts Finance.

While these figures may sound paltry compared to the daily volume of $500 million or more in the bitcoin options market on centralized exchanges, they are significant for relatively smaller coins like AAVE and LUNA.

Options trades on AAVE price

AAVE is the 57th largest cryptocurrency with a market cap of $3.6 billion and spot market daily volume of $250 million, according to CoinGecko data. LUNA, the native coin of Terra’s blockchain, ranks 14th as per market valuation. Leading centralized exchanges like Deribit do not offer option contracts tied to these coins.

“We bought AAVE calls at $360 strike price sold by Ribbon Finance on Nov. 12,” said Sit. He also serves as an adviser to Ribbon Finance and ThetaNuts Finance.

AAVE is the native token of decentralized lending-borrowing protocol Aave. The cryptocurrency was trading near $310 on Nov. 12 and changed hands near $274 at press time.

QCP also bought bitcoin and ether calls and ether puts via Ribbon Finance on Nov. 12, generating a notional volume of over $200 million, Ribbon Finance co-founder Julian Koh said in a Telegram chat.

“Covered call,” an options-trading strategy that leans neutral to bullish, involves selling out-of-the-money (OTM) call options – those with strike prices above the current spot price – while owning the underlying asset. A call option gives the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date. A call buyer is implicitly bullish on the market and pays a premium to the seller for offering protection against a price rally.

Ribbon Finance covered call strategy

With Ribbon Finance, the covered call strategy is automated. Investors need to deposit their AAVE into the vault, which takes care of other complexities like selecting the appropriate strike level for selling the weekly option.

The vault sells weekly AAVE call options against 100% of deposits every Friday at 11 a.m. UTC in return for the premium (paid in AAVE) by buyers, mostly consisting of market makers. The premium received represents the yield from the strategy and is distributed to users in proportion to their deposits.

If AAVE expires below the strike at which the call is sold, the depositors retain the entire premium received. If the option expires in the money with AAVE settling above the call strike, the option buyer can purchase AAVE at the strike price, and depositors lose money.

DeFi options trading

By and large, the recently launched AAVE vault functions similar to Ribbon’s ETH and BTC covered call vaults discussed in depth in September.

Structured products offered by Ribbon Finance and other protocols like StakeDAO and ThetaNuts Finance yielding double-digit returns are becoming increasingly popular as returns decline from so-called cash and carry strategies.

“DeFi options vaults are the key to scalability for options and structured products on DeFi,” QCP’s Sit told CoinDesk in a Telegram chat. “We see this as the real DeFi 2.0 wave.”

Ribbon Finance has registered a volume of more than $2 billion since the launch of the first option vault in April, Koh said. ThetaNuts is planning to launch option vaults for BTC, ETH, ALGO, AVAX, LUNA, SPELL and several other cryptocurrencies on Dec. 3, protocol’s manager told CoinDesk in Telegram interview.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.

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