Watch the full video of this episode of the panel discussion on Gamma Prime’s YouTube channel
Panel discussion with John Divine (Fin Market Professional at
BlockFills)
In this video, we break down Ethereum options markets. Learn how Ethereum is evolving into a balance sheet asset, how treasury managers hedge risk, and how statistical arbitrage and structured options can unlock yield opportunities. Whether you’re a trader, portfolio manager, or DeFi enthusiast, this deep dive shows you how to use Ethereum options to protect, profit, and strategize in both traditional and decentralized finance.
John (BlockFills)
I’m going to talk to you today about Ethereum options markets. We’re going to cover these in two segments: first, through bilateral trading—as in over-the-counter trading or via an exchange—and second, in the context of decentralized finance and how options markets and structured products are going to start trading, or even more significantly, continue to expand in decentralized venues.
So, why are we talking about Ethereum options? Number one, before I get to the bullet points, Ethereum is already becoming a balance sheet asset for a number of entities—corporations, hedge funds, and of course, Ethereum whales that are already invested in the asset. If, like Bitcoin, Ethereum is going to become a balance sheet asset, treasury managers need to be able to manage the risk between ETH and dollars, or the ETH-dollar spread.
Ethereum is also a global settlement layer, making it perfect for clearing options transactions. Options are risk transfer mechanisms, and we’re going to put them to work to defend Ethereum positions.
As I already said, decentralized options exchanges are gaining momentum. The next iteration will not just be vanilla options, but structured products and exotic options. This is where it gets very exciting for traditional finance that’s going to start using Ethereum rails.
I wrote a book on Bitcoin options. The same strategies apply to Ethereum. This book is available on Amazon for anyone who wants to learn more about how to manage risk or generate real yield. I have two copies with me right now, so if anyone is interested after the presentation, come find me and I’ll give you a copy.
Here’s what we’re going to talk about: statistical arbitrage, covered calls, zero-cost collars, cash-secured puts, and risk reversals.
This is the market I’m going to show you. It’s the March 28th Ethereum options market. I took this screenshot on Friday when I put together the slides. Ethereum was trading at 2655. The futures price, the forward contract for March, was trading at 2676. The days to expiration for these futures and options is 34 days, and volatility was at 63 percent.
Notice the spot price of Ethereum and notice the forward price. You can see how the spot price trades under forward. There’s a 9.4 percent annualized rate of return for anyone interested in that spread. That’s where I’m going to start the presentation.
This is statistical arbitrage. The blue line on the screen is spot, and the green line is the forward price. I can buy spot Ethereum and sell the March 28th futures contract and annualize 9.4 percent. Now, this is with Ethereum going through a bit of a rough patch. This spread is usually much bigger than 9.4 percent. When Ethereum is in a bull market, the spread can blow out to 20 or 25 percent.
Astute traders, portfolio managers, and treasury managers can buy spot Ethereum, sell forward, and lock in that spread as a P&L gain for their portfolio or treasury. We call that the basis trade.
There are some other things you can do. You can either collect that spread as yield—9.4 percent—put it in your pocket, or you can buy spot Ether, sell forward, take that spread, and buy call options. If Ether rallies, you’re going to have a gain significantly greater than 9.4 percent from the call option. You can also do call spreads or buy binary call options.
So that’s the basis trade: buying spot Ether and selling forward.
Now I’ll talk about options. There are two types of vanilla options: call options and put options.
A call option grants the holder the right to own Ethereum at the strike price on the expiration date. The expiration date I’ll reference is March 28th, which is the last Friday of this coming month.
Put options are the opposite. They allow the holder of the contract the right to sell Ethereum at the strike price on the expiration date.
Ethereum options contracts are one ETH. One contract represents one Ethereum. The expiration dates are weekly, monthly, or quarterly. They expire on Fridays at 8 a.m. UTC.
The strike price is the price at which a transaction will occur if the option is in the money. It’s either a call or a put, and settlement is either in Ethereum or in U.S. dollars/stablecoin.
