Options Trading at Rysk
The Evolution of Options On-Chain
Introduction
Rysk Beyond introduces an exciting improvement in on-chain options pricing, enabling anyone to buy and sell options at multiple strikes and expiries through an AMM.
This AMM was built to offer tight bid-ask spreads and deep concentrated liquidity to option traders, whilst ensuring platform composability enabling protocols and structured products to integrate with ease. Hedging efficiency was also a key focus, reducing the risks for LPs whilst increasing their returns.
This article will dive into the options market, from traditional finance to early decentralised alternatives, finally arriving at Rysk Beyond.
Traditional Options Trading
You probably already know that in traditional markets, options are kind of a big deal. They form a fundamental part of the current financial system, enabling directional trading, hedging strategies, and other tools for efficient risk management. In fact, the traditional options market has grown so large, the notional value of contracts traded recently surpassed Shares trading volume, globally.
An option gives its purchaser the right, but not the obligation, to buy (Call) or sell (Put) the underlying asset at a specific price, on or before a certain date. This makes options diverse in their application, being used for:
- Speculation: essentially a bet on future price direction — buying a Call option over a token directly, a trader can introduce leverage (using less capital for a higher potential upside)
- Hedging: can be thought of as insurance — buying a Put option can limit a trader’s downside losses, reducing risk at a reasonable cost whilst enjoying the upside of a Long position elsewhere (this is why options were invented)
- Trading volatility: instead of trading the price of an asset, options enable the trading of the volatility of the underlying assets price movements — this enables a whole new realm of quantitative trading possibilities that we won’t get into today
However, as with all centralised trading operations, traditional options trading requires the custody of user funds at a third party along with other intermediary-associated risks. In addition, these operations are non-transparent and often completely siloed between institutions, not to mention discriminatory to certain nationalities.
Decentralised Options Trading
Along came decentralised finance (DeFi), offering a potential path to overcome these challenges. A place where users have complete control over their funds through self-custody, where all transactions and records are open and transparent. An ecosystem where applications are available to anyone, from anywhere and are built in an open and composable fashion, allowing new products to be constructed within, around and on top of existing ones.
However, moving options on-chain presents more of a challenge than some other financial instruments. Some of the earliest attempts had several issues preventing their adoption:
- Low liquidity across strikes and expiries: insufficient liquidity will lead to large slippage, introducing execution risk for trades with size.
- Large, unappealing spreads: high bid/ask spreads can result in hidden costs for traders, eroding profits and aggravating losses, reducing the overall PnL of traders. This also becomes a wider issue when attempting to sell an option back to the AMM, where the price offered (the bid) will be much lower than that paid (the ask).
- Poor capital efficiency: selling options previously on-chain required far more collateral than a centralised exchange.
- Located on a slow, expensive layer-1 blockchain: leading to execution issues and gas-intensive, often multiple transaction operations.
- Inflation-based returns for participants: traders and LPs were often incentivised through inflated native token emissions, artificially increasing returns or masking losses.
From the study of the shortfalls of both Traditional Options and previous Decentralised Options, we are pleased to bring you Rysk Beyond with the goal of overcoming these hurdles.
Options Trading at Rysk
Fully Transparent and Non-Custodial
Anyone can access the Rysk Beyond protocol to buy and sell options at a variety of strikes and expiries or build options strategies with on-chain execution and settlement. With Rysk Beyond there is full transparency on the mechanism, price parameters, collateralization and risks associated with trading.
Trade directionally, hedge or construct complex risk management strategies all across one single AMM — for traders, protocols, structured products and market makers.
Rysk Beyond is built with full transparency at the heart. We envisage an open, collaborative DeFi options ecosystem and invite anyone to build on top of our AMM.
Unified Liquidity across Multiple Expiries and Strikes
Unlike a classic order book model with fragmented liquidity across strikes, expiries and products, Rysk Beyond utilises one single vault (DHV) that acts as the counterparty for all trades. Such an implementation reduces slippage and execution risk experienced with low liquidity order books.
Rysk Beyond will launch with ETH-based options across a range of strikes and expiries. New asset and collateral types will be onboarded in due course.
Tight Bid/Ask Spread
The pricing mechanism for Rysk Beyond has been meticulously crafted to reduce the spread between the bid and ask prices of an option. This is achieved through additional slippage and spread models applied on top of a Stochastic Volatility Modelled price. The tighter the bid/ask spread, the less of a trader’s PnL is eroded over time, and the prospect of selling back to the vault becomes more sustainable.
Optimised UI and UX for Traders
Options traders come in many shapes and forms, from directional traders to traders hedging downside to volatility (vol) traders.
- Speculator: seeking the strike and expiry that fits their bias and gives the largest upside with the lowest premium
- Hedger: focused on delta and price metrics to find the best-fitting trade
- Vol trader: interested in the implied volatility (IV) across different strikes and expiries to spot a good opportunity
The Rysk UI was built with traders in mind, resulting in a minimal UI that enables them to easily find the main information they need to trade seamlessly.
1-Click Options Strategies
Rysk Beyond has been architected such that a trader can create an options strategy, consisting of multiple contracts, atomically in one transaction, with low execution risk. This enables traders and protocols to develop advanced strategies on-chain, increasing capital efficiency and reducing the execution risk of purchasing multiple options. This will soon be available on the front-end but can already be actioned at the smart contract level.
Focus on Capital Efficiency
Enabled by the Rysk-Opyn Gamma protocol, multi-collateral partial collateralization enables option writers to choose which collateral to use (multi-collateral), whilst lowering the requirement for collateral against the option (partial collateralization). The less collateral required, the higher the capital efficiency. This progress reduces the collateral required for traders interested in trading naked options while keeping the opportunity to create fully collateralized products such as covered calls.
Rysk Beyond launches with stables (USDC) and ETH as collateral, however, the list will be expanded in the future to include yield-bearing assets, for example. The Rysk team are working on optimizing parameters to increase capital efficiency, with an important optimization on the horizon soon after the Rysk Beyond mainnet launch.
Composability First
Rysk is built with collaboration and composability in mind. Anyone can trade options on Arbitrum using Rysk, where positions are represented as an ERC-20 token. This means that open options at Rysk can be traded OTC, traded on other markets, and integrated into other DeFi protocols with endless use cases thanks to full composability.
We aim to build an open and collaborative platform in the DeFi ecosystem so traders can fully benefit from our composable nature, having multiple venues and use cases for the traded options.
Potential Arbitrage Opportunities
Rysk Beyond pricing welcomes arbitrage opportunities as a mechanism to reduce risk exposure and adjust prices. Arbitrageurs can find opportunities to arb Rysk with other venues/derivatives to keep our mechanism healthy and rebalance sell and buy-side demand.
Options Enthusiast Community
Rysk is not just a product but a community of crypto and options enthusiasts interested in building a better financial system. Trading with rysk is not just a financial trade but an opportunity to create a better financial system together.
Traders are incentivized to send feedback, help improve the protocol and enable us to build a product that can be competitive vs TradFi and CeFi, creating the foundation for a mature DeFi ecosystem.
Can I Trade Already?!
You bet you can.
The Rysk x GammaSwap Testnet Trading Competition is currently live, with over $50k in prizes up for grabs, as well as many special partner offers.
Make sure to join our Discord community to engage with a whole host of Options enthusiastic and give us all your feedback on the Beyond testnet.
