Many people understand the basics of buying stocks. Much fewer are comfortable with options. Options trading has a bad reputation because many feel like the financial instrument is too complex to understand.
Others feel like it is hard to correctly predict the market and actually buy the option at the right time to ensure profit. Options-related scams have also dominated headlines. In March 2019, the United Kingdom’s Financial Conduct Authority (FCA) banned the sale, marketing, and distribution of binary options to retail customers.
In contrast to ‘traditional’ options, binary options do not change in value. The option either pays out upon expiry (in the money), or it expires as worthless. Many scammers were successfully peddling binary options that were very unlikely to turn a profit. They collected large premiums but never had to actually payout.
Despite negative headlines; Options are actually a useful financial tool
While many traders perceive options as bad news, author Mark Wolfinger of “The Rookie’s Guide to Options” explains they are actually risk-reducing tools. In his words, “they are used to hedge risk, so the myth that options are too risky is not true. Options are risky if you don’t understand how to use them.”
Those who often struggle with options are usually buying ones that are cheap and out-of-the-money. The stock must then make big moves, quickly, for the trader to make a profit. Wolfinger writes how most see these types of options as “mini-lottery tickets and hope that the occasional win will be huge.”
But what if traders could buy and sell options in a simplified manner? Premia Finance intends to change the economic landscape through its decentralized financial protocol. Platform users can ‘mint’ (write) customized calls and put options.
The benefits of Decentralized options trading
Unlike some other trading platforms, Premia permits the creation and trade of options at a variety of strike prices (in specific increments), with any expiration date (any week within the next year), and in any platform-supported token. Collateral is held until expiration and input are paid out in the American-style model.
A peer-to-peer marketplace on the platform facilitates the buying and selling of options at the market rate – provided there’s an existing offer. An on-chain order book means transactions are done in a decentralized manner.
Option customization on Premia comes thanks to the use of the ERC1155 standard. Support for any token can be added to the marketplace with just a single transaction. Other standards require a new contract for each new token, and even for every new token, strike price, and option expiration contract.
Will blockchain eliminate fears about Options trading?
Many believe blockchain technology and decentralized finance can mitigate some of the concerns about options trading. The incorruptibility and security of blockchain (at least compared to traditional finance), are major positives for those wary of centralized authority when it comes to money.
Fees are also much less than traditional financial counterparts, along with settlement times.
On platforms like Premia, a user only needs access to the Internet and a crypto wallet to receive funds. People can buy and trade options without having to hand over sensitive financial information or run into restrictions based on what type of bank account they have, or where they live.
Options remain alluring because they are one of the best ways to survive, and thrive, in bear markets. Conservative traders often rely on put options to protect against losses.
Those ready to stomach more risk can turn towards naked put options, where the buyer does not actually own the underlying instrument. A naked put potentially gives a buyer the opportunity to collect a nice premium and also buy shares of the stock at a fantastic price, assuming the stock rebounds up later.
While a bear market can quickly impact a portfolio, smart options trading can be one of the better ways to weather the storm. As more people become comfortable with trading online, especially as different platforms make it easier to do so, options trading should continue to rise in popularity.