Inside the Mind of a Directional Trader

Let's rewind to the Ethereum merge. You're a trader working at a thesis-driven liquid fund and, after months of research, you're convinced the price of ETH will rise significantly post-merge. How would you express your view?

Spot

The simplest strategy is to buy ETH spot outright, which gives you linear exposure to the performance of ETH. Using spot, however, is less capital efficient than using a derivative, since spot exchanges offer less leverage than derivatives exchanges (if any at all).

Your LPs would not be willing to pay for exposure they could easily get themselves—they invested in your fund for your edge as a thoughtful, well-informed trader, not for your ability to buy and hold spot ETH. So you look for alternative ways to beat the market with the capital you have on hand.

Perpetual Swaps

You start looking at ETH perps. Perps are usually more liquid than spot, since they trade without physical delivery of the underlying, and they're more capital efficient, since they're offered on leverage. A levered perp position may seem attractive, but it's a perilous double-edged sword. Large amounts of leverage can give you enhanced upside exposure, but come with path-dependent liquidations that can wipe out your entire position during small price moves.

You do the math and discover that a 20x levered ETH position has a >40% chance of getting liquidated if held for a day, increasing to nearly 88% if held for a month.

Trading perps on leverage is stressful and operationally intensive due to the high base volatility of most crypto assets. Unless you carefully manage the margin for your perp positions, regular intraday variance as combined with the occasional “scam wick” can easily wipe you out. Such price moves can happen in seconds, and they catch even the most sophisticated traders off guard. All in all, even if your terminal directional view is correct, without diligent and active collateral management, you're likely to get liquidated before you can realize profits.

As a professional trader, you're devoted to producing superior returns for your LPs, but you also don't want to wake up at 2AM to manage your margined perp position. So you look for an instrument that is less operationally intensive to manage and path-dependent.

Options

You begin investigating options markets for ETH. Options offer embedded leverage through their asymmetric, convex payoff profiles. By buying options, you can achieve levered exposure to an asset without having to actively manage margin collateral.

That said, it's difficult to put on an options position using existing venues without professional experience navigating complex options chains and evaluating greeks. If you have the expertise, though, you can express your view by purchasing a vanilla call option or a call option strategy spread that expires shortly after the anticipated merge date. If you are correct, you can earn a windfall profit, and if you are wrong, the maximum amount you lose is limited to the fixed price you paid for that option.

Intrigued by the risk-reward profile, you venture over to an options exchange such as Deribit to purchase several ETH calls expiring in September.

As it turns out, you weren't the only trader to have this idea. Looking at historical data, we see that open interest in ETH options trading skyrocketed into the merge in September—eclipsing BTC options for the first time—as traders poured capital into options both to hedge and to take directional bets on the outcome of the merge.

As the day of the merge comes and passes, the post-merge ETH God candle you expected fails to materialize, but through options structures, you only suffered a small loss on your portfolio. Moreover, your LPs are satisfied by your prudent risk management strategies.

Maybe options aren't so complicated after all, you think to yourself, as you contemplate your next trading opportunity. Just then, a news story hits your inbox—”Your favorite Layer 1 is announcing significant changes in governance structure and validator fee distributions.”

Never a boring day.

The State of Altcoin Options Markets

Altcoins as a whole have now reached a market cap comparable to that of ETH, and more market participants are reaching for altcoin derivatives to hedge and trade catalysts. But despite this growing demand for derivatives and safer forms of leverage, altcoin options markets remain illiquid, opaque, and fragmented.

Currently, most altcoin options are traded through bilateral OTC deals, which are difficult to source and operationally intensive to settle. These deals often require trade minimums and prior relationships, which limits trading opportunities to a small group of well-connected funds and treasuries. Even after establishing those relationships, pricing must then be solicited across multiple desks in a manual and time-consuming process.

This tedious price discovery process, in addition to onerous post-trade workflows and the need to continually assess counterparty risk, places a high barrier to entry for individuals and smaller shops that want to explore using options to enhance their trading strategies.

Those seeking a more accessible and standardized alternative trading venue have limited choices, as few exchanges offer options on alts. Most of the larger exchanges are designed around order books, which are structurally incapable of supporting options trading for illiquid assets.^[1]

To date, there has been no trading venue that has standardized the price discovery and settlement workflows for altcoin options. The market has not yet addressed the unique challenges of bridging demand and supply for altcoin options—until now.

Enter Strike

Today, we at Revv are excited to finally showcase Strike, the first product built with the help of Revv's marketplace infrastructure and derivatives trading expertise.

Traders and hedgers need advanced tools for getting precise directional exposure to a variety of crypto assets. Strike addresses this through an intuitive options trading experience that enables traders to flexibly construct limited-loss options strategies—starting with call spreads, put spreads, and iron condors—on a wide range of underlying assets, against any strike or expiry, using only USDC.

Traders accustomed to trading perps will find it easy to use Strike, as they can express their directional views just as easily as putting on a position at a perp exchange. Strike aggregates fragmented altcoin options liquidity through its electronic RFQ system, and because contracts are fully collateralized and settled on-chain, users are insulated from counterparty risks.

The end result is a platform and trading experience optimized for directional funds, hedgers, and event-driven traders.

Strike's Unique Solution

On-demand primary and secondary liquidity

With Strike, users can trade options strategies on strikes, assets, and expiries not offered by any existing trading venue, with liquidity provided on-demand by leading market makers. Strike does not restrict traders to a standardized options chain, which allows directional traders to construct tailored options strategies that precisely map to their market views.

Asymmetric upside, fully secured

All trades on Strike are limited loss strategy spreads, which are auto-constructed based on the user's specified target prices and trade timeframe. On Strike, if your terminal view is correct, you're in the money. These fully collateralized spreads allows takers to be confident they will receive their asymmetric payouts if in the money, even during “black swan” events such as GME's violent upswings and LUNA's death spiral. On the maker side, strategy spreads are more capital efficient as they have capped loss, so they can be fully collateralized with USDC instead of the underlying, as would be the case for naked options.

Trustless, on-chain settlement

All of Strike's markets are fully collateralized with USDC and permissionlessly settled using an on-chain protocol built on Solana. This means Strike never has to manage liquidations, clawback users, or carry an insurance fund to ensure traders get paid out. Collateral is deposited on a per-trade basis, so users don't need to keep idle capital sitting in their accounts to put on trades.

Blazing fast price discovery via electronic RFQ

On Strike, takers and makers are matched through an RFQ system that can serve the unique liquidity profile of altcoin options and which supports programmatic integration through institutional grade APIs. Trades are atomically and immediately executed after an RFQ and quote are matched—then settled on-chain within seconds.

Conclusion

As crypto markets evolve and ecosystems grow, so too does the demand for directional trading and hedging instruments. We believe Strike solves a pressing need in the space by defragmenting altcoin options liquidity and providing an alternative to perpetual futures, and we look forward to supporting other teams that are building trustless and non-custodial marketplaces.

We are working towards open-sourcing the modular infrastructure that Strike was built on top of so it can be used to solve even more problems in the space. If you're also interested in making use of Revv's financial expertise or marketplace infrastructure, drop us a note at @revv_xyz.

To learn more about Strike, visit strike.trade, or follow @strike_trade on Twitter.

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Appendix

RFQ Primer

In TradFi, illiquid assets like options on emerging market currency pairs or off-the-run bonds are typically traded via RFQ. In an RFQ system, when a trader wants to trade, they request a quote from a set of dedicated market makers. If they like the prices they get back, they can execute against the best price—if not, they can just pass on the trade.

For makers, it's much easier to support liquidity through RFQs vs. CLOBs, as they only need to provide prices upon receiving an RFQ rather than managing an active bid/ask spread across multiple order books. This significantly reduces the costs of price discovery and allows liquidity providers to flexibly allocate their capital in accordance with demand.

For takers, RFQ systems can help facilitate trading even in relatively illiquid markets. They are a natural fit for products like options strategies, which can be parameterized in many different ways and which require atomic execution of multiple trade legs to achieve the desired exposure.

As it stands today, there's not enough liquidity to support an altcoin options order book, nor could order books support the flexibility of Strike's options contracts. That's why we helped design Strike around electronic RFQ, as it's an effective way to source liquidity for complex, heterogeneous assets.