Announcing Atomic Credit Spreads
Bringing a 10X+ capital efficiency into on-chain options selling
Introduction
Atomic credit spreads are now available on Rysk, and they are poised to revolutionize on-chain options trading. One of the main challenges with DeFi options is the substantial collateral needed to write and sell options.
Since the beginning, Rysk has focused on improving capital efficiency and has become the top protocol for collateralization in DeFi. To learn more about this, visit: https://blog.rysk.finance/making-defi-options-capital-efficienter-rysk-feature-spotlight-1cab665cf7cc.
Today, we are excited to announce another significant advancement in enhancing collateralization and improve the options trading experience with the introduction of the atomic credit spread.
Understanding Credit Spreads
A credit spread is a type of options strategy that involves simultaneously selling and buying options contracts with different strike prices but the same expiration date. The goal of a credit spread is to receive a net premium upfront by selling the more expensive option and buying the cheaper option. This net premium received (called credit) is the maximum profit potential of the trade. The maximum loss for a credit spread is limited to the difference in strike prices minus the net premium received when initiating the trade.
The difference between the two options’ strike prices is called the spread width. This strategy is also called vertical credit spread because the strike price distance is usually shown as vertical on a options interfaces. The spread width determines the strategy risk/reward profile.
Atomic Credit Spreads with Rysk
In most exchanges, trading a credit spread typically involves two separate trades: one for selling and one for buying. This introduces a potential execution risk. Additionally, when selling an option, it is usually necessary to post collateral. The amount of collateral is determined by considering the unlimited loss potential of selling an option. As a result, the required collateral is often high, whereas a low amount could lead to significant liquidation risk.
And here is why Atomic Spreads on Rysk are so powerful. On Rysk, traders can open a credit spread atomically in a single transaction. This is achieved with a very efficient collateral requirement, eliminating the need for liquidation and reducing execution risk.
But how this works on Rysk?
When a trader opens a credit spread, the following actions occur at protocol level, atomically, in a single transaction, without any execution risk:
- The trader opens a long position by buying the option from DHV.
- Collateral is deposited for the short position. The collateral consists of the long position bought from DHV and a cash component equal to the spread width. This innovation allows the trader to use a long position as collateral, making the position highly capital efficient.
- The trader opens the short position by selling the option to DHV.
- At this point, the credit spread is effectively opened. The trader receives a premium that is the difference between the short premium received and the long premium paid. The spread is fully collateralized (long position + cash component) without any liquidation risk.
Let’s consider an example. ETH is currently trading at $1666, and we want to trade an ETH call credit spread. We establish the following position:
- SHORT ETH 27OCT23 $1700 CALL
- LONG ETH 27OCT23 $1800 CALL
- Net premium received: $25
The trader can buy the ETH 27OCT23 $1800 CALL from DHV and use it as collateral, along with 100 USDC (long strike — short strike). At expiration, we have three scenarios:
- If the ETH spot price is less than $1725, the short option expires Out Of The Money (OTM), resulting in the maximum profit. The trader keeps all the premium received.
- If the ETH spot price is between $1725 and $1825, the short option expires In The Money (ITM), while the long option expires Out Of The Money (OTM). In this case, the position incurs a loss. The maximum loss occurs at $1825 (strike + net premium) and is equal to the spot price minus the short strike. The maximum loss can be up to $100 when the spot price is $1825.
- If the ETH spot price is greater than $1825, both positions expire In The Money (ITM), and the long position becomes profitable. However, any profit from the long position is offset by losses on the short position. The maximum loss remains at $100, which is the difference between the two strikes.
Since the required cash collateral is equal to the difference in strikes plus the long option, the position is always fully collateralized, and there is no liquidation risk!
Calls vs Puts in Credit Spreads
Credit spreads can be constructed using either call options or put options. When using call options, the trader sells a lower strike price call option and buys a higher strike price call option on the same expiry. This strategy is known as a bear call spread and is used when the trader has a bearish sentiment and expects the price of the underlying asset to remain below the lower strike price.
On the other hand, when using put options, the trader sells a higher strike price put option and buys a lower strike price put option on the same expiry. This strategy is called a bull put spread and is employed when the trader has a bullish sentiment and anticipates the price of the underlying asset to stay above the higher strike price.
Bear Call Credit Spread
Let’s look at an example of bear call credit spread. Alice believes that ETH price is moving downward and she decided to open a call credit spread on Rysk. The strategy is as follows:
Short Position
Option: ETH 27OCT23 $1700 CALL
Premium: $39.64
Long Position
Option: ETH 27OCT23 $1800 CALL
Premium: $18.87
Credit Spread
Net premium received: $20.77 (short premium — long premium)
Cash collateral required: $100 (long strike — short strike)
Break-even: $1720.77 (short strike + net premium received)
Max loss: $79.23 (long strike — short strike — net premium)
Bull Put Credit Spread
Let’s look at an example. Alice has a bullish sentiment and wants to generate income while having a defined risk position. She decides to open a bull put spread on Rysk. The strategy is as follows:
Short Position
Option: ETH 27OCT23 $1650 PUT
Premium: $47.10
Long Position
Option: ETH 27OCT23 $1550 PUT
Premium: $22.91
Credit Spread
Net premium received: $24.19 (short premium — long premium)
Cash collateral required: $100 (short strike — long strike)
Break-even: $1625.81 (short strike — net premium received)
Max loss: $75.81 (short strike — long strike — net premium)
Conclusion
In conclusion, the introduction of atomic credit spreads on Rysk marks a significant advancement in the world of on-chain options trading. By allowing traders to open credit spreads atomically in a single transaction, Rysk enhances collateralization and reduces execution risk. With the efficient use of collateral and the elimination of liquidation risk, traders can experience a more capital-efficient and streamlined options trading experience.
Whether you have a bullish or bearish sentiment, credit spreads offer a versatile options strategy that can help you generate income while managing risk. With the ability to construct bear call spreads or bull put spreads, traders have a range of opportunities to explore on Rysk.
Remember, the world of on-chain options trading is evolving, and Rysk is at the forefront with its capital efficiency and innovative features. If you’re ready to revolutionize your options trading experience and take advantage of atomic credit spreads, visit app.rysk.finance now and start trading!
Trade atomic credit spreads now on Rysk 👉 https://app.rysk.finance
Learn more on how to trade credit spreads on rysk 👉 https://docs.rysk.finance/guides/how-to.../trade-options-strategies#credit-spreads
Happy trading, and may the volatility be ever in your favor!
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