In the previous issue of the SIMETRI Edge, we discussed a relatively low-risk yield generation strategy based on options. Don’t worry if you didn’t get it 100% last week, as today we will do a hands-on exercise that should help you feel confident before putting your money on the line.

For this lesson, I will use the Deribit testnet. You will learn how to set everything up and sell your first option. Let’s kick it.

Deribit is one of the leading crypto derivatives exchanges. It may seem that it has many contenders besides Binance and FTX, but in reality several exchanges are in the top-10 because they report fake volumes.

Source: CoinGecko.

One of the key advantages of Deribit in our case is that it offers a relatively easy way to create demo accounts. To get one, go to Deribit Testnet main page.

The exchange’s interface is quite intimidating. However, I don’t see a good way the team could’ve made it look cleaner. You may have heard of binary options before, which look like this.

Source: Investopedia.

Just a couple of buttons and minimal amount of information. Although this looks simple, the binary options niche is crowded by scam projects that trick people into thinking options are easy. By looking at a proper interface like that of Deribit, you should get a feeling that it’s not true.

Still, there’s no reason to be discouraged at this point. You can safely learn them without putting real money on the line. Plus, you already have a low-risk strategy to follow. 

On the exchange’s main page, go to the upper-right corner and click on Register.

Fill in all the fields and create an account. Once you have registered and logged in, go to the upper-right corner of the page again, click on your account’s name, and select the My Account option.

At the top of the page, you have selectors for currencies. Make sure it’s set to USDC. You will need it for deposits.

In the left panel, select Deposit, then click on the Generate a deposit address button on the right. You will get a USDC address. Copy it.

Click on this link to access the Deribit Testnet faucet to get some test money. Make sure your selector at the top is set to USDC, then paste in your account’s address and click on Make deposit.

You will get a pop-up notification, and a transaction will be sent. Wait a bit for it to confirm, and you will see that your balance has been updated.

Now you are almost fully set up to sell your first option. You have a burger icon next to the Deribit logo in the top left corner. Click on it, and in the sliding panel, select Options in the Trade section.

You will see the “Unsupported Currency” error. That’s fine. Think about it: you can trade only volatile assets, not stablecoins. So, at the top of the page, switch back to BTC.

On the page, you will see three sections that you should care about: Account Summary, Options, and Positions. The most complicated is obviously Options. 

To make it look more comprehensive, click on the >> icon a couple of times next to any expiration date.

You will end up with several expiration dates to choose from. Remember, the strategy we’re employing isn’t about short-term volatility. So, let’s pick an expiration date somewhere out in the future.

Once you click on some expiration date, you will see data for Calls to the left and Puts to the right. In our case, we will use Puts as a bet on the fact that BTC won’t go as low as $25,000 by April 29, 2022.

If you haven’t read the previous email, make sure to do it. Otherwise, it won’t be easy to follow what I will say from now on.

Given our bet with selling a Put option, we will have to buy BTC or pay a price difference at $25,000 on April 29, 2022, if the market price goes to or below this level. Hence, if the price doesn’t go as low, we will walk away with a premium, which is the best outcome.

Unfortunately, Deribit doesn’t offer cash-secured puts, so if the price expires at or below $25,000, you pay the difference to the option’s buyer instead of buying BTC from them. If you treat your USDC position as BTC equivalent, the covered put strategy still works, though it becomes less straightforward. If the price drops, you technically have more BTC.

There are platforms like FTX US Derivatives that offer cash-secured puts. The underlying concepts are the same, so don’t worry about that too much for now. You will have no problems using other trading venues if you can understand how it all works by playing with Deribit.

We only care about several columns in the Puts section: Strike, Size, and Delta.

Starting with Delta, it should be higher than -0.15 for Puts for the reasons outlined in the previous email. This is your guiding metric. The best delta we have on the screenshot above is -0.09. That means that there’s a high probability that you will be right, and you can make reasonable money by placing the bet.

Size tells you how many units of an asset in question, in our case BTC, is available for trading. The minimal size of a contract on Deribit is 0.1 BTC.

Double click on the contract with the appropriate delta, and you will see the trading window. Since you’re selling, you only care about Bid Price in the order book. Before you sell into it, though, you need BTC because it’s the currency in which contracts are valued.

Click on your account in the top right corner and select Swap. There you will see a typical Uniswap-like interface to swap between BTC and USDC.

After you swapped some BTC, go back to the trading window. Select the highest bid and look at the left side of the window. Quantity is how many BTC you’re willing to bet on. Skip the rest, you don’t need it for now. Then click on Sell.

Congratulations, you now sold your first option. If you scroll the page a bit down, you will see it in the Positions section below.

Take your time to familiarize yourself with the interface. Although there’s a lot of information, not all of it equally matters to start things off. You have unlimited free money to learn, so don’t be afraid.

If you feel stuck, Deribit has a good course on options, so if you have spare time, it should be worth your while. Till next time.

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Disclosure: At the time of writing, the author held ETH and several other cryptocurrencies. Read our trading policy to see how SIMETRI protects its members against insider trading.