DeFi Options Strategies: Vaults, Covered Calls & Structured Products
Options are the most powerful financial instruments in traditional finance. DeFi is finally bringing this sophistication on-chain with automated vault strategies that generate yield. Learn how to use them profitably.
- Options vaults automate strategies like covered calls to generate yield on your holdings.
- Covered calls trade upside potential for immediate income—great for sideways markets, not bull runs.
- Thrive tracks your vault positions and alerts on expiry, strike events, and strategy performance.
Options Strategy Payoff Calculator
Visualize how different options strategies perform across price scenarios:
Strategy Insight: Covered calls generate income but cap your upside. Best when you expect sideways to slightly bullish movement. The premium received lowers your cost basis.
Options Fundamentals for DeFi Traders
Options give you the right (but not obligation) to buy or sell an asset at a specific price by a specific date. This simple concept enables sophisticated strategies unavailable with spot trading alone.
Key Options Concepts
Call Option: Right to buy at the strike price. Profitable if price rises above strike + premium paid.
Put Option: Right to sell at the strike price. Profitable if price falls below strike - premium paid.
Strike Price: The price at which you can exercise the option.
Premium: The price you pay (buyer) or receive (seller) for the option.
Expiry: When the option expires. DeFi options typically have weekly or monthly expiries.
ITM/ATM/OTM: In the money (profitable to exercise), at the money (strike = current price), out of the money (not profitable to exercise).
Why Options Matter
Options enable strategies impossible with spot trading:
- Generate income: Sell options to earn premium on holdings
- Hedge positions: Buy puts to protect against downside
- Leverage efficiently: Control exposure with less capital
- Profit from volatility: Trade IV independent of direction
- Structured payoffs: Create custom risk/reward profiles
Key Insight: In TradFi, options volume often exceeds spot volume. Crypto options are still nascent—early adopters who understand them have significant edge over those who only trade spot.
Covered Call Vaults: The Gateway Strategy
Covered calls are the most popular DeFi options strategy, automated by protocols like Ribbon Finance. Here's how they work:
The Mechanics
- You deposit ETH (or other assets) into the vault
- Each week/month, the vault sells out-of-the-money call options
- Market makers buy these calls, paying premium to the vault
- If ETH stays below strike at expiry: vault keeps ETH + premium
- If ETH exceeds strike at expiry: ETH is sold at strike price
When Covered Calls Work Best
- Sideways markets: ETH oscillates in a range, you collect premium each epoch
- High IV environments: Elevated premiums compensate for risk
- When you'd sell anyway: If strike is your target sell price, win-win
- Income focus: When yield matters more than moonshot potential
When Covered Calls Hurt
- Strong bull markets: ETH moons to $10K but you sold at $3K strike
- Sharp rallies: Premium earned doesn't compensate for missed gains
- Low IV: Premium too small to be worth the risk
Strike Selection Strategy
Most vaults select strikes 10-30% out of the money. You can often choose between vaults with different risk profiles:
- Conservative (30% OTM): Lower premium, higher probability of keeping your ETH
- Moderate (15-20% OTM): Balance of premium and assignment risk
- Aggressive (10% OTM): Higher premium, more likely to cap gains
Alpha: Track which strikes vaults are selecting. If vaults consistently use 20% OTM strikes and ETH has moved 15% intra-week, consider whether this cycle's volatility matches their assumptions.
| Strategy | Market View | Max Profit | Max Loss | Best When |
|---|---|---|---|---|
| Covered Call | Neutral/Slightly Bullish | Strike - Entry + Premium | Entry - Premium | Sideways markets |
| Protective Put | Bullish but Hedged | Unlimited - Premium | Strike - Entry + Premium | Uncertain markets |
| Long Straddle | High Volatility (Either Direction) | Unlimited | 2x Premium | Before major events |
| Cash-Secured Put | Bullish | Premium | Strike - Premium | Want to buy dips |
Protective Puts: Portfolio Insurance
If covered calls are about generating income, protective puts are about protecting capital. Think of them as insurance for your portfolio.
How Protective Puts Work
- You hold ETH and want to protect against crashes
- Buy put options at your pain point (e.g., 20% below current price)
- Pay premium for this protection
- If ETH crashes: puts gain value, offsetting your losses
- If ETH rises: puts expire worthless, you keep gains minus premium
When to Use Protective Puts
- Holding large positions: When losses would be catastrophic
- Before major events: Earnings, upgrades, regulatory decisions
- Elevated uncertainty: When you want exposure but fear downside
- Tax optimization: Protect gains without selling (jurisdiction dependent)
The Cost of Protection
Put options aren't free. In high volatility environments, protection is expensive. Calculate whether the premium is worth the peace of mind:
- Typical cost: 2-5% of position value per month for ATM puts
- Further OTM = cheaper but only protects against larger drops
- Rolling puts each month compounds costs
Don't over-insure. If you're constantly buying puts, you might just need a smaller position.
Major DeFi Options Protocols
Ribbon Finance
Strategy: Automated covered call and put-selling vaults
Assets: ETH, BTC, AVAX, SOL, APE
How it works: Weekly epochs where vault sells options to market makers (Paradigm OTC). Premium distributed to depositors.
Best for: Passive yield seekers who want hands-off options exposure
Considerations: Weekly lockups, can't choose your own strikes
Dopex (Decentralized Options Exchange)
Strategy: Options trading + Atlantic options + SSOV (Single Staking Option Vaults)
Assets: ETH, DPX, rDPX, various
How it works: Active options trading with unique features like Atlantic options (collateral-efficient puts)
Best for: Active traders who want to trade options, not just deposit in vaults
Considerations: More complex, requires options knowledge
Lyra Finance
Strategy: Options AMM with automated market making
Chains: Optimism, Arbitrum
How it works: AMM prices options using Black-Scholes + volatility surface. LPs provide liquidity, traders buy/sell options.
Best for: Traders wanting liquid options markets on L2
Considerations: LP positions have complex risk profiles
Premia Finance
Strategy: Cross-chain options with peer-to-pool model
Chains: Ethereum, Arbitrum, Optimism, Fantom
How it works: Underwriters deposit collateral, buyers purchase options from pool
Best for: Cross-chain options exposure
Considerations: Newer, less liquidity than established protocols
Advanced Options Strategies in DeFi
The Wheel Strategy
Combine cash-secured puts and covered calls for systematic income:
- Sell cash-secured puts at your desired entry price
- If assigned: now own the asset at a discount
- Sell covered calls against your position
- If called away: profit from appreciation + premium
- If not called: keep earning premium, repeat
The wheel works best in range-bound markets with assets you'd be happy to own.
Straddles and Strangles
Long Straddle: Buy both call and put at same strike. Profit from large moves in either direction.
Long Strangle: Buy OTM call and OTM put. Cheaper than straddle but needs bigger move to profit.
Use before major announcements, upgrades, or when you expect volatility but don't know direction.
Iron Condors
Sell an OTM put spread and an OTM call spread simultaneously. Profit if price stays within a range.
- Defined risk (spread width minus premium received)
- Works in low volatility, range-bound markets
- Complex to manage; not yet common in DeFi
Calendar Spreads
Sell near-term options, buy longer-term options at same strike. Profit from time decay differential and IV changes.
Requires deep understanding of Greeks. Limited DeFi availability due to limited expiry dates.
Risk Management for Options Traders
Position Sizing
Options can move 100%+ in a day. Size positions assuming total loss is possible:
- Never risk more than 1-2% of portfolio on a single options trade
- For vault deposits, size based on opportunity cost, not just loss potential
- Avoid overleveraging with cheap OTM options
Understanding the Greeks
Delta: How much option price moves per $1 move in underlying
Theta: Time decay—how much value option loses per day
Vega: Sensitivity to implied volatility changes
Gamma: Rate of change of delta
As a vault depositor, you're primarily exposed to delta (direction) and vega (volatility). Understand these before depositing significant capital.
Volatility Risk
Selling options is short volatility—you profit when actual volatility is less than implied. But volatility can spike unexpectedly:
- Market crashes increase IV dramatically
- Short options positions can move against you fast
- Covered call vaults can underperform in IV spikes
Risk Alert: "Picking up pennies in front of a steamroller" describes short options strategies. Premium income is steady until a tail event wipes out months of gains. Never sell options you can't afford to be assigned on.
How to Evaluate Options Vaults
Key Metrics to Analyze
- Historical APY: Past performance across different market conditions
- Strike selection methodology: How do they choose strikes? Is it transparent?
- Epoch duration: Weekly vs monthly affects flexibility and compounding
- Counterparty risk: Who buys the options? OTC vs AMM vs order book
- Smart contract risk: Audits, TVL history, team reputation
- Withdrawal mechanics: Lockups, queue times, early exit penalties
Red Flags
- Unusually high APY claims (likely unsustainable or misrepresented)
- Opaque strike selection or counterparty details
- No historical performance data
- Unaudited contracts or anonymous team
- Complex fee structures that eat into returns
Matching Vault to Market View
Expect sideways: Covered call vaults optimal, earn premium while waiting
Expect rally: Avoid covered calls (cap gains), consider put-selling if you'd buy dips anyway
Expect crash: Don't sell puts, consider buying puts or staying in stables
Uncertain: Smaller allocation to vaults, maintain flexibility
Frequently Asked Questions
What are DeFi options vaults?
Options vaults are automated strategies that generate yield by selling options. The most common is the covered call vault: you deposit ETH, the vault sells out-of-the-money calls, and you earn the premium. If ETH stays below the strike, you keep premium and ETH. If it goes above, your ETH is called away at the strike price.
What is a covered call strategy?
A covered call involves holding an asset and selling call options against it. You receive premium (income) in exchange for capping your upside at the strike price. If the asset stays flat or declines slightly, you profit. If it moons, your gains are limited. It's bullish but not aggressively so.
How do protective puts work?
Protective puts are portfolio insurance. You buy put options that give you the right to sell at a specific price (strike). If the market crashes, your puts gain value, offsetting losses on your holdings. You pay premium for this protection. It's bearish hedging while maintaining upside exposure.
What are the risks of options vaults?
Main risks: (1) Opportunity cost if price moons past strike, (2) Vault strategy may not match your view, (3) Smart contract risk, (4) Premium income may not compensate for missed upside in bull markets, (5) Deposited assets are locked during vault epochs. Understand the strategy before depositing.
How do I choose the right strike price?
Strike selection depends on outlook. Higher strikes (further OTM) = lower premium but less chance of assignment. Lower strikes (closer to money) = higher premium but more likely to cap gains. Most vaults select strikes 10-30% OTM based on volatility. Review vault parameters before depositing.
What is implied volatility and why does it matter?
Implied volatility (IV) reflects the market's expectation of future price movement. Higher IV = more expensive options = more premium for sellers. Options vaults profit most when IV is high but actual volatility is lower. Sell options when IV is elevated, avoid selling during IV crush.
Which DeFi options protocols are most popular?
Major protocols include: Ribbon Finance (ETH/BTC covered call vaults), Dopex (options trading and Atlantic options), Lyra (options AMM on Optimism/Arbitrum), Hegic (on-chain options), Opyn (options primitives), and Premia (cross-chain options). Each has different strategies and risk profiles.
Can I lose money in a covered call vault?
Yes. If the underlying asset drops significantly, you still hold the asset and suffer those losses—premium received only partially offsets. You can also miss major gains if price exceeds strike. Covered calls aren't free money; they're a specific risk/reward trade-off.