What to know : Institutions are increasingly using bitcoin options strategies on altcoins to manage price volatility and enhance returns. STS Digital reports a rise in altcoin options trading, driven by demand from venture capitalists, foundations and large holders.
Institutions are increasingly using proven bitcoin options techniques on alternative cryptocurrencies to protect against price swings and earn extra returns, STS Digital, a principal trader specializing in digital assets derivatives, told CoinDesk.
"Our client base includes token projects and foundations, investors with large holdings, and asset management firms managing exposure ahead of liquidity events," Maxime Seiler, co-founder and CEO of STS Digital, said. "Increasingly, we’re also seeing these participants apply option strategies that were historically used in Bitcoin to the altcoin space."
Options are derivative contracts that give the purchaser the right, but not the obligation, to buy or sell the underlying asset at a predetermined price at a later date. A call option represents a bullish bet, giving the purchaser the right to buy the asset at a specified price at a later date. A put option represents a bearish bet, protecting the buyer from a price decline.
The option seller is essentially writing insurance against bullish/bearish moves in return for an upfront compensation, called a premium.
Institutions holding bitcoin tend to sell options, writing BTC calls at levels above the going market price, and collecting the premium. This premium represents additional income on top of their spot BTC holdings.
This so-called covered call strategy has been one of the most popular institutional plays since the early 2020 crash. Institutions have also pursued other methods, such as writing bitcoin puts to boost income during price rallies, buying puts as downside hedges, and buying call options to participate in the bull run.
Now, institutions and other entities, such as project founders holding large amounts of altcoins, foundations, venture capital firms and private players, are using the same playbook in other cryptocurrencies, or altcoins.
According to Seiler, these strategies are increasingly being pursued in altcoins since the Oct. 10 crash, which saw exchanges forcefully close even profit-making bets (auto-deleveraging) to socialize losses.
"Beyond covered calls, institutions are actively using put selling for yield, downside hedging, and call buying to gain upside with defined risk. These strategies are increasingly being applied to altcoins as investors look to manage exposure without taking forced liquidations risk (ADL) that drove the October 10 crash," Seiler said.
"It’s a clear example of why options are a more robust way to express risk in volatile markets," he added.
STS Digital is a regulated digital asset trading firm that acts as a principal dealer for institutional investors, providing liquidity and quoting options, spot trades and structured products across over 400 cryptocurrencies.
The breadth of its offering lets the firm cater to rising demand for altcoin options, while centralized platforms like Deribit focus on derivatives for major ones like ETH, XRP and SOL.
The firm settles billions in altcoin options volume annually through bilateral trades. All transactions occur directly between STS and clients, with STS taking the other side of the deal to provide liquidity and instant execution.
Seiler expects continued growth of options tied to bitcoin and other tokens over the coming years.
"Looking ahead, we see strong and sustained institutional adoption continuing to drive demand for options as the preferred way to manage digital asset exposure. With adoption having accelerated relentlessly over the past year, periods of consolidation and low volatility are increasingly viewed as attractive entry points ahead of the next wave of market catalysts," he said.
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