πŸ€Όβ€β™‚οΈSynth Options vs. Traditional Options

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

Benefits of Synth 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

  • Capital Efficient: Rather than pay a non-returnable upfront premium, which can be upwards of 100% of notional, you deposit refundable collateral equivalent of 10% of the notional covered -The 'hedging costs' of the algorithm gradually reduce collateral, which needs to be periodically topped up

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

    1. Theoretical option premium

    2. Option Seller risk premium

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

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

    5. Option Market fees

    Whereas, with synthetic options, you only pay:

    1. Umoja fee (which includes the insurance fund fee)

    2. 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: Umoja charges a protocol fee upfront for every Synth execution. Umoja extracts no profit from the operation of Synth Options algorithm itself, other than the upfront Umoja fee.

  • Flexible Termination: At any time, you can cancel your hedge and get your collateral back, plus or minus any P&L the hedging 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 are able to 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 OptionsUmoja Synth Options

Customizability

Limited selection of strikes and expiries.

Unlimited selection of strikes and expiries.

Capital Efficiency

Upfront premium, which can be > than notional.

10% refundable collateral + gradual payment of accrued transaction fees.

Cost

Fixed, Payable Upfront.

Variable, Payable during the life of the option.

Out-of-the-Money Strikes

Low liquidity and large bid-offer spreads

No bid-offer spread

Early Termination

Client cannot cancel option before expiry, but call sell the position & deal w/ large bid-offer spreads + CEX fees

Client can cancel the Synth Option at any point, with no liquidity constraints or need to pay hefty exit

Token Coverage

BTC and ETH

BTC, ETH, AVAX + will expand to more tokens over coming months

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