Synth Options vs. Traditional Options

Synth Options are more affordable, flexible, and liquid than traditional Crypto Options.

Benefits of Umoja´s Synth Options

Synthetic Options are said to be ‘one-sided’: unlike a traditional option, there is no need to match an option seller counterparty on the other side of the trade. This provides extensive flexibility regarding the creation of Synthetic Options. The following comprises the strongest benefits of Umoja's Synth Options:

• Fully Liquid on all Strikes & Expiries: As the Synth Option is one-sided, there's no need to standardize strikes and expiries for liquidity: you can choose whatever strikes/expiries suit you best. You also don't need to pay the very large bid-offer spreads you see on the out-of-the-money strikes.

• Flexible Notionals: With standard options, notionals are standardized and are typically large (e.g. 1 BTC). Synthetic Options allow much more flexible notional sizes, for example, 0.01 BTC minimum notional in the case of BTC synthetic options.

• Capital Efficient: Rather than pay a large premium upfront, with Synthetic Options, you need only deposit collateral equivalent to 10% of the notional covered, and provide additional ‘top up’ collateral only if and when required. In future releases, you can choose to withdraw any collateral above 10% of notional, thus allowing you to extract option profits without having to close your position.

• Reduced Cost: With traditional two-sided options, the options premium you pay includes the following:

  • Theoretical option premium

  • Option Seller risk premium

  • Market demand premium skew (market demand can drive up put/call premiums significantly)

  • Market bid-offer spreads (can be very wide for out-of-the-money options)

  • Option Market fees

    Whereas, with Umoja´s Synthetic Options, you only pay:

    • Umoja fee (which includes the insurance fund fee), and

    • Algorithm hedging costs (which are variable, but expected to be close to the theoretical option premium, with a cap set by the Insurance Fund).

• Transparent Fees: We charge our fee upfront. We do not make money from the operation of the hedging algorithm. We want to make it as efficient as possible. Umoja extracts no profit from the operation of the hedging algorithm itself, other than the upfront Umoja fee.

• Flexible Termination: At any time, you can cancel your Synthetic Option and get your collateral back, plus or minus any P&L the Synthetic Option algorithm has generated. With a traditional option, you can’t exit the option early, but you may be able to sell your position (usually with high bid/offer spread costs).

• Broad Token Coverage: Although we’re starting with BTC and ETH, we can create Synthetic Options for any token with a liquid perpetuals market.

Umoja Synth Options vs. Deribit Options

Synth Options are more capital-intensive than traditional options, as they require the holder to put down refundable collateral. However, they are typically much more affordable, and always more liquid and flexible.

Synth Option advantages are particularly significant in non-BTC/ETH token markets where overall options liquidity is downright terrible. Low liquidity means larger spreads and higher premiums - particularly during bear and bull markets where market sentiment is polarized (i.e. biased toward a Put or Call).

	Deribit Options	Umoja Synth Options
Customizability	Chooses from a limited number of strikes and expiries.	Choose any strike and any expiry.
Notional	Notionals are large and inflexible.	Notionals and flexible, and can be much smaller.
Capital Efficiency	Upfront premium paid, which can be in excess of 100% of notional.	Pay 10% collateral at initiation, plus top-ups if required.
Cost	Fixed, Payable Upfront in a lump sum.	Variable, payable during the life of the option.
Out-of-the-Money Strikes	Low liquidity and large bid-offer spreads for out-of-the-money strikes.	No bid-offer spread on out-of-the-money strikes.
Early Termination	The client cannot cancel the option before expiry but can sell the position (which involves large bid-offer spreads, Deribit fees, etc).	The client can cancel the Synthetic Option at any point, with no liquidity constraints or need to pay hefty exit fees.
Token Coverage	BTC and ETH.	BTC, ETH, and AVAX + will expand to more tokens in the future.