What are Synth Options?

A synth option is a perpetual futures trading strategy that clones the value of a traditional option.

A Synthetic Option is a proprietary trading algorithm that attempts to replicate the economic performance of a traditional option. The algorithm does this by continuously adjusting positions in a ‘replicating portfolio’ of tokens and perpetuals in response to market price movements.

Umoja offers 2 types of Synthetic Options:

1. Synthetic Put Options

2. Synthetic Call Options

Important Note: Synthetic Options are run by Umoja on a best-efforts basis: the synthetic option may perform better or worse than the traditional option it is attempting to replicate. Umoja does not sell options or provide insurance.

What are the benefits of a Synthetic Option?

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.

• Fully Liquid on all Strikes & Expiries -As the 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 of 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.

• 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

How much does a Synthetic Option cost?

With a traditional option, the cost of the option (the ‘premium’) is paid upfront in a lump sum and is known exactly from the start. For crypto markets, this lump sum can be a large amount, particularly for longer-dated options.

With a synthetic option, the cost of the algorithm is paid gradually over the term of the option, but the precise costs are not known upfront with certainty and depend on market volatility and funding rates over the life of the synthetic option.

While we provide an estimate of costs based on recent volatility and rate projections, this is only an estimate. We can’t say with certainty in advance whether the costs will be lower for a synthetic option versus a traditional option in a specific instance. However, our historical analysis shows that, on average, synthetic options have slightly lower costs than traditional options.

How do I create a Synthetic Option?

To create a synthetic option, you must post collateral equivalent to 10% of the notional amount. This collateral is required to fund the underlying replicating portfolio.

When the synthetic option is closed, due to expiry or cancellation, your collateral is returned to you, plus/minus the P&L made by the synthetic option to that point.