Hedgey
Why Would You Buy A Call?
Buying calls is something you do when you think a token price will rise and you want to get a good deal at a premium
Buying a Call is a great way to use Options to do a few things as a crypto investor:
a) Use Leverage to allow a smaller amount of capital to have exposure to a larger sized underlying asset
b) Take a position in a promising new project while minimizing the amount of capital risked
c) Hedge future expected asset needs against rising prices
d) Hedge liquidity pool assets against Impermanent Loss
Buying a Call is the opposite of selling a Put. It is a bullish strategy.
Get whale size positions for cheap
Many crypto investors speculate on the direction of the prices of cryptocurrencies. With Call options, if you believe that the price of one cryptocurrency against another (say PAR / ETH) will appreciate, you can purchase a 1mm PAR call with a strike price above the current PAR/ETH price in hopes that the price will appreciate and you can participate in the upside.
The benefit of using a call instead of buying the underlying 1mm PAR is: you may not have enough cash to purchase the total amount! or even if you do, you can purchase more or riskless money for the same crypto exposure. This is called leverage, where a smaller amount of money gets you exposure to a larger amount of underlying currency movements. If the price of PAR goes up — you can exercise your option and, with the same 1 ETH invested, earn significantly more on your investment than investing the 1 ETH directly into PAR. Besides, you’ve only risked 1 ETH instead of whatever the cost is to purchase the 1mm PAR, so if for some reason it dumps, then you aren’t left holding a bag.
Speculating on moonshots without getting rekt
We know that new crypto projects pop up all the time, but which ones are good, and how do I know if my investment in one will pay off or if the project will fold and I’ll lose my whole investment? When you purchase calls — you can now invest only a little bit of cash, and if the project does well, and the token value appreciates, you get to participate in all of the upsides and purchase the tokens for cheaper than they are selling on the market! And if the token value depreciates — well, at least you have only put in a small amount of cash compared to what you would have needed to purchase the same amount of the underlying.
Hedging
Some more sophisticated users may also use calls to hedge a future anticipated obligation of a specific cryptocurrency that is not yet due. To illustrate this, it is easiest with an example:
Suppose that user A has a known requirement to send 10 ETH to another party B 60 days from now, and user A does not currently have enough USDC to purchase 10 ETH but will receive a loan from a bank for 20,000 USDC in 60 days (or less). User A doesn’t know the price that 10 ETH will be, and if the price of ETH is higher than 2,000 USDC, then his loan from the bank will not allow him to purchase the full 10 ETH. As such, he can purchase a Call contract (which can be thought of as similar to an insurance contract) for 10 ETH with a strike of 2,000. If the price of 1 ETH is less than 2,000 USDC when he receives the 20k USDC loan, then he will simply purchase the ETH in the open market, but if the price of ETH is greater than 2,000 — because of the Call, he can exercise the contract, deliver the 20k USDC to the call writer, and receive his 10 ETH.
Solving Impermanent Loss
With the rise of Uniswap and liquidity pooling, there is also the risk of impermanent loss, which can be effectively hedged against with DeFiDe call options. Impermanent loss is the notion that when you put a mix of ETH and token PAR into a liquidity pool if the price of PAR appreciates against ETH, then at a later date when you go to remove your liquidity, you will end up with more ETH than you started with and less PAR. You end up with more of the less valuable token and less of the more valuable token relative to each other. It is argued that had you just held your PAR, your gains would have been more significant than putting it in a liquidity pool to earn fees.
Liquidity providers can hedge against future token appreciation by purchasing calls. Suppose a liquidity provider provides liquidity for ETH / PAR Uniswap pool and then simultaneously purchases a call on PAR / ETH. If PAR's price appreciates, when the liquidity provider goes to remove their liquidity, they will receive back much more ETH than PAR. However, we can assume that the Call option is in the money — and thus, they can exercise it with the additional ETH returned from liquidity to purchase back their PAR and re-establish the previous positions held before providing liquidity.
Note: if you wrote a call option and you'd like to exit the position, you can buy back an identical option through the Hedgey UI to exit the position
Example buying a call
Vitalik purchases one Ethereum call option (ETH) on Feb 05 with a $1000 strike price for a $65 premium price. The call option expires on Feb 12. Vitalik sees that Ethereum’s price has skyrocketed to $1500, well above the strike price before the call expires.
Vitalik decides to exercise the contract. He uses his right to buy ETH at $1500. This pockets him a $1500 — $1000 — $65 = $435 profit from a $65 initial investment.
If the price had not gone above $1000, Vitalik would have only lost the $65 premium. Which he can easily regain by flipping Ethereum, should he be an ETH holder.
Last modified 6mo ago