Top 10 DeFi Option Trading Techniques

Let's look at 10 DeFi trading techniques to get passive income

Peer-to-peer technology is the foundation of decentralized finance (DeFi), which eliminates mediators from the system. DeFi platform democratizes finance and displaces conventional centralized organizations like banks, brokerage firms, and NBFCs by relying on a peer-to-peer ethos and self-executing "smart contracts" on the public blockchain. DeFi trading strategies provide an extensive selection of alternatives for techniques that both reduce risk and increase profit. Traders can benefit from the flexibility and power that stock options offer with a little effort. In light of this, this article gathers the top 10 DeFi trading techniques.

1. Covered Call: Covered Call is one of the top DeFi trading techniques; it is a widespread technique and is nearly always preferred to naked stock since it enables traders to earn even if the stock does not move at all and limits their losses if the stock price declines. The trade-off is that you have to be prepared to sell your shares at the short strike price, which is a predetermined price.

2. Protective Collar: Buying an out-of-the-money put option and writing an out-of-the-money call option simultaneously is the protective collar approach. The same thing must be the underlying asset and the expiration date. Investors frequently employ this tactic following significant profits on a long stock investment. As the long-put helps lock in the potential sale price, this enables investors to have downside protection. The trade-off is that they might be forced to sell shares at a higher price, giving up a chance to make more money.

3. Protective Put (Married Put): In this approach, an investor buys stock shares while investing in put options covering an equal number of the corresponding shares. An investor may adopt this method to minimize their adverse risk when holding a stock. This tactic works like an insurance policy; it sets a price floor if the stock price drops significantly.

4. Long Call Spread: This tactic falls under vertical spread tactics. The simultaneous purchase and sale of options of the same kind (puts or calls), with the same expiration date but a different strike price constitutes a vertical spread. An investor who uses a long call spread strategy simultaneously purchases call at one strike price and sell the same number of calls at a higher strike price. Both call options' underlying asset and expiration date will be the same. When an investor is positive about the underlying asset and anticipates a little increase in its price, they frequently use this type of vertical spread strategy.

5. Long Straddle: When a trader buys a call and a put option with the same strike price and expiration date on the same underlying asset, this is known as a long straddle options strategy. When an investor thinks the value of the actual asset will move noticeably outside of a specific range but is unsure of which way the move will go, they frequently employ this approach. Theoretically, this method gives the investor a chance to realize limitless profits. Yet, the most significant loss this investor can sustain is only the total cost of the two options contracts.

6. Lending and Borrowing: One of the most well-known decentralized applications for borrowing and lending cryptocurrency is called Compound. It allows users to loan their cryptocurrency to a third party and receive interest on the loan. If someone needs money to pay their rent or buy groceries but all of their assets are locked up in cryptocurrency investments, they can also get a collateralized loan. The smart contract from Compound operates by automatically matching lenders and borrowers and dynamically modifying interest rates by supply and demand.

7. Platforms for Stablecoin: With the Maker Oasis dapp, DeFi users can create their DAI-based stablecoin. Users also have the option to hold MRK. This distinct governance token allows them to vote on crucial choices like the protocol's stability fee, just like the Federal Open Market Committee does for the Federal Reserve's Funds Rate.

8. Synthetic Resources: Synthetix, a platform that enables users to generate and then exchange synthetic versions of real-world commodities like gold, silver, conventional currencies like the U.S. dollar or Euro, and even other cryptocurrencies, gets into some of the stranger DeFi use cases. These synthetic assets can only be created on Synthetix after being backed by surplus funds secured in smart contracts.

9. Game Savings: PoolTogether, which describes itself as a "no loss" game for anyone who wants to participate, is among the most entertaining of the limitless possibilities made possible by DeFi. Users add DAI stablecoins to a shared pot, which is subsequently staked on another protocol, to use the system. Everyone else receives their initial stake back at the end of the month, and one lucky provider is picked randomly to get all the interest those funds collectively earned.

10. Metal Condor: The investor holds both a bull put spread and a bear call spread when using the iron condor technique. The bull put spread and the bear call spread are used to create the iron condor. The bull put spread is created by selling one out-of-the-money put and buying one with a lower strike.