Options as a better DCA exit strategy

During the past few weeks I’ve been reading a lot of posts written by people that want to cash out some crypto profits at predefined price levels. A typical such post would be like this: “I own 100 Eth and want to cash out 25% of my stack when Eth reaches $2,500, another 25% when Eth reaches $5,000, another 25% when Eth reaches $10,000, and keep the last 25% in perpetuity”.

There are some issues with this strategy. The main one: this is very hard to pull off from a psychological perspective. Although drafting an exit strategy usually involves a lot of thought and analysis, once the asset reaches euphoria levels human psychology tends to diverge either to a risk-averse stance (selling before the assets reaches predefined prices) or to straight greed (rationalizing a risk-on strategy). Second, by doing this people might be leaving significant value on the table.

· What are options / crypto options

In essence, options award the holder the right to either buy or sell the underlying asset at a fixed price within a defined time period. The buyer of the option pays the seller a premium for that right, and the seller needs to maintain a reasonable level of collateral to ensure the buyer will be paid if and when the option is exercised. Crypto DeFi options have taken off recently, mostly for BTC/WBTC or Eth, but also for other tokens like YFI or Uni. I’ve personally used Deribit for a lot of trades and my experience has been very positive; Opyn is a solid decentralized platform under development, and also Hegic which in my own view frankly totally sucks from a user’s perspective.

· Maximizing value at exit

Why would this be relevant for someone wanting to draft an Eth exit strategy? Because given the fact that he/she wants to limit his exposure to Eth starting at a certain price (i.e. “sell”), by using this strategy he/she can bypass psychology and collect an additional premium — even if Eth doesn’t reach the intended target price within that period.

Lets prove this with some rough numbers. Assuming the Eth holder (“seller”) wants to assume no liquidation risk, he/she transfers 75 Eth to Deribit as collateral. He market sells 25 Eth 31DEC21 $2,560 call options, 25 Eth 31DEC21 $5,000 call options, and 25 Eth 31DEC21 $10,000 call options, earning 14.75 Eth in total premiums.

Using Eth options as a DCA exit plan (prices 1/8/2020)

The main benefits of this strategy are:

1. 14.75 Eth in instant additional profit that can either be sold now or held

2. If target prices are not reached within this year, maintaining full exposure to the original 100 Eth (and can repeat the process after the period expires)

3. Less pressure to stick to his/her exit plan — however if at any point the seller wants to get out of the position, he/she simply needs to buy back the same option.

Although it brings some additional risks:

1. Smart contract risk

2. Liquidation risks if not using 100% of Eth as collateral

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