# On-Chain Options: Derive's Strategy for Crypto Derivatives

**Podcast:** The Milk Road Show
**Published:** 2026-01-28

## Transcript

If you don't know where your edge is coming from, you should not be trading.
What's up, everybody?
It's LG DUSET here, and welcome to the Milk Road Show, the daily crypto show that tells you where traders actually go after their old playbooks stop working.
Today is January 28th, 2026.
Listen, what's your appetite for risk?
Because if you're in crypto, it's probably pretty high, just like me.
As our community and the broader crypto space has discovered and aped into the world of perps in the last few years, there's actually another classic financial derivative that's been making its way on chain.
Options.
Today we have Nick Forster, CEO and founder at Derive to talk about how they have become the number one on chain options desk and how this type of product is making us even more bullish.
And here's a little bonus.
I don't know anything about options.
So this is going to be a one-on-one for LG today.
Today's episode is brought to you by Bridge.
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Nick, what is going on, man?
Welcome to Milk Road.
Hey LG, thanks for having me on.
Okay, let's just dive right into it.
I became a big perps trader in the last couple of years, for better or for worse.
And I had to learn all about it.
I didn't know what that meant.
I literally leverage was something I was just like, don't do leverage.
And everybody comes on the show and says don't do leverage.
And the financial advice is don't do leverage.
Um, but I'd love to know from you.
Uh Derive has been around for five years.
You've now become the number one on-chain options desk.
Give me an oversight of where crypto has been in the last 12 months and how these types of, I guess like slightly riskier instruments have come into play.
Yeah, um, I think this has been a really, really positive, good 12 months for crypto.
Um, and particularly for crypto natives who are building um, you know, applications um for the for the first time really.
The market structure has changed a ton.
Um, like you said, perps became the biggest sort of flavor of the last six to twelve months.
Um, we saw hyperliquid hit a fully diluted valuation of you know, like 30, 40 billion dollars, which is kind of insane to think about.
Um, and it's really posing like a threat and a challenge to a lot of the centralized exchanges, so much so that you get the behavior from Binance launching an on-chain competitor or Coinbase refusing to list the hype uh you know token as as uh you know for trading, despite it being one of the biggest.
And I think what that has proved out is that if you build a great product with on-chain Rails, people will come to it and they'll flock to it.
And the the I guess the wrong lesson that a lot of people in crypto drew from that was that perps are going to be is like kind of like the only use case and the the biggest market that you know, we need like a thousand perp decks like hyperliquid.
Um, and you saw this influx of tons of people building a new flavor of perp decks with kind of a different small spin on things and different farming programs and points programs.
I'm not sure how many uh people listening to this will be active on chain and like played that game, you know, rotating through the different perp decks, trading on them, um earning rewards.
But I think fundamentally the thing that shifted in the last 12 to 24 months in crypto is that like the game, the days of like airdrop farming, points farming, you know, endless rotation of capital from protocol to protocol and application to application is dying down because of the you know relative muted performance of like new tokens on TGEs, as well as just like a profound sense of, hey, like there's a huge uh you know, traditional companies are realizing and recognizing how big you know the potential for uh blockchain and on-chain financial systems really is, and they're coming for our launch.
So people have to get serious, you know, both from the builder and the community side around like which teams, which protocols have built something that can really go up against um you know the incumbents in traditional finance.
So I'm seeing, you know, what we're seeing is you know, perps, they've done a really good job of you know breaking out in crypto, giving people easy leverage, but there is so much more to the financial stack than just a leverage slider and an up-down price preference.
Um, and that's kind of where options come in.
Um, and that's what we're focused on.
We've been sort of building in this space for for five years.
They let you make kind of any potential bet, um, you know, to the upside, to the downside, you can hedge, you get, and like I guess the kicker for a lot of people with options and the leverage they provide is one, you can't get left liquidated.
And two, the more correct you are, uh, you win at an increasing rate.
Um, and that might sound similar to perps in some ways, because if you, you know, you you win, but you win linearly, right?
Like if you have a uh 10x levered long perp uh for 100,000 worth of Bitcoin and it goes up 10%, you make 10,000.
If it goes up 20%, you make 20,000.
And as a function of your size of your bet, that's the same payoff.
It's just a straight up line.
With options, you get this sort of second order effect where you win more uh the more correct you are.
So you can make a bet uh and instead of winning, you know, like 10x on a 10x levered long bet, you can make 50, 100, 200x if you're more correct.
Um, obviously that's the speculative side.
There's whole other reasons, you know, for yield generation and insurance that institutions use options as well as you know, retail traders, and we can get into that.
Um, but uh we're seeing, and what I'm seeing is a fundamental shift in the market structure away from like these mercenary um farming games to like real use cases of the on-chain tech.
And um, really that's kind of uh what's getting me going right now in the industry, even though a lot of people are kind of feeling a bit sad uh over the last three months as as the price actions kind of stalled out.
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We're getting to four months now, Nick.
And so we're gonna be saying four months.
1010 is gonna be almost four months old at this point.
Um, okay.
So here's a moral question for you, Nick.
Should people be doing this stuff?
And before you even explain options to me, it sounds very attractive.
Like you're saying there's tons of upside as if you're right, and and that's very tempting uh for uh DGens like me.
But is this even the perp side has absolutely nuked so many people and it makes it easier for them to come back for more options?
We can't get liquidated, but I'm assuming you can still lose.
Before you even tell me more about options, is this something that that that even uh retail traders or whatever we consider ourselves here at Milk Road, us and our audience, is this something that we should even be doing?
I would say like it's definitely a mixed bag there.
Like if you don't know, I the number one lesson I I had a career in in like trading at one of the largest firms before is is that like if you don't know where your edge is coming from, you should not be trading.
Like you should be able to point to a very specific reason why your opinion is correct, what the market's general prevailing opinion is, and why the market is wrong about like their opinion.
If you can't do that very clearly, then you probably shouldn't be using any form of derivative, any sort of speculation, even like from like a you know specific asset selection choice and buying spot.
You should only do that if you think, you know, versus buying an ETF or just buying like Bitcoin, I guess, which is the crypto index, if you think you have a reason, like a strong investment thesis that like the market is missing.
Um, so what I would say for options uh and and perps as well is you just need to know like exactly what the bet you're making is.
Um, and certainly for options, like I would say when I'm not at a professional trading firm, in a lot of ways, I can be kind of like a retail options trader myself.
Like I don't have you know tons of algorithms and quant data and whatever to like really narrow it narrow in on the edge.
Um, but there are some spots where you can use them for like longer term leverage.
You can buy a six-month call, which gives you you know liquidation free protect, you know, upside to Bitcoin if you have a reason to think Bitcoin's going up.
Um, but I would just say know exactly why you're trading.
And once you get to that point, um, you know, it's just another tool in your toolbox to express an opinion.
So um, from a retail perspective, I would say it's definitely worth thinking through why you're doing what you're doing.
On the flip side, you know, some people might want to generate yield using a collateral that they're holding, which options also accommodate like you can earn 10 to 20% to 30% of the value of your collateral in US dollar premiums by you know writing insurance or selling upside um with that collateral.
Again, you need to be very comfortable with the risk you're taking.
So as long as you know what that risk is um and you have a good feeling for why you're putting on a trade with respect to like why you're correct or why you want to make a trade and what the market is potentially missing or what the market needs then I would definitely be cautious because these are the kinds of instruments that as you said like can blow people up even people doing the right thing like what happened on 1010.
Okay.
So I I have about a hundred questions about this because I I am curious about this yield on collateral but let's start at step one what exactly is an option trade or derived what is even the term for options is it option trade options trade.
Yeah that's right it's a okay give me a scenario give me an applicable scenario to right now like let's say I think Bitcoin is gonna go to 150k uh in the next six months let's hope that that's that's what that's what we've been saying so let's like assume it's that how could I use an option?
Yeah okay that's perfect so what you could do is um so an option and like a call option uh specifically is what you would use if you're bullish on Bitcoin it's the right to but like not the obligation to buy the asset in question at a specific price at a given time or before a given time but you know typically it's just at a given time.
So I guess a concrete example of this with your thesis um is the June 26th expiry we're talking in you know January so you've got about five months until now if you think Bitcoin's going to 150k what are your options you can buy a you can buy bitcoin and hold so if it goes up from 90k right now at time of recording to 150k you're making you know roughly like you know 60 or something like that um which is a good return um you can but you have to put up 90 000 to do it um immediately you could go 10x level long on Bitcoin with a perpetual um and then if it goes up you know you you can put down um you know nine thousand dollars and if it goes up you know to 150k and never goes down more than 10 so you don't get liquidated which is a big if over six months especially these days then yeah exactly then then you are um you know you turn your nine K into 60k which is like a six X.
Um but that's a good that's that's perp trading.
That's option trading right that's so that's spot and then perps and then options.
So what you could do is you could buy, um, depending on how risk on you want to be and how convinced you are, you could buy an option that would be like the you know 110 000 strike Bitcoin call.
And what that means is if Bitcoin is trading at 150k in five months, you have the right to buy it for 110,000.
Um, and that's like contractual, it's like how the instrument is constructed.
And the difference between 110k and 150k is 40,000, which means that right, that instrument at the time of expiry is worth 40,000.
How much is it trading for right now?
Um, I'm looking at the board right now.
It's $3,700 for a Bitcoin option.
So you buy one of these for three $3,700 today.
If you're right, that turns into $40,000 in uh six months.
Now and if I'm wrong and it doesn't happen by that date, then that's that option expires and I'm out the $3,700.
Exactly.
You're at your $3,700.
So you can turn, you can make, you know, in that example, $36,000 if it if it if it goes up to $150K.
You can make like $10,000 if it goes up to $120K, but um really for any scenario where Bitcoin stays the same price as it is today, even if it grinds higher to like $100K or $105K, you're getting nothing.
It really has to go to your thesis for this to work out.
But you can't get liquidated.
You have this.
But wait, hold on.
So I could sell it at $120 though.
Yeah.
Okay.
It would expire in the money.
And you can trade this the whole way.
You don't have to hold it for six months.
Like that's just the end state.
So like these options are tradable in between.
Got it.
And that, you know, the value will go up over time if it if the price is going up fast enough.
Um, but the trade-off is you get nothing if it's below 110k in in six months' time.
Um, so you kind of have this very like defined bet.
It's almost simple like spiritually closer to prediction markets in a lot of ways, um, in some ways than perpetuals because prediction markets, you put some money up, it's either worth, you know, you you bet on the coin toss at the Super Bowl.
It's like either a dollar, it's either you know one or zero, uh, depending on whether it's heads or or not.
Um and for you know, for options, it's kind of the same thing.
It's it's either above the strike or it's below, and then you win more as it goes further above the stride.
And there are things on prediction markets that are similar to options.
That's like price of ETH by February uh 28th, you know, and it'll be like 5,000, 4,000 or whatever, and it gives you the different, they're not odds there.
You're kind of trading the share of the outcome, but um similar, but yours is obviously a lot more sophisticated because uh it's something that's been around for a long time.
So who's who's fronting that trade then?
Like who is who is offering that to me as a user?
It's anyone who wants to generate yield on the other side um with their Bitcoin.
So if you you can flip that equation and go, okay, if I'm a Bitcoin holder and it's $90,000, um, you know, uh LG might pay me $3,700 um for the right to buy my Bitcoin at $110K.
And maybe I want to sell at $110K in six months.
And I'm just like happy to commit to that outcome now.
Like I don't get the upside above $110K, but I know for sure you're paying me $3,700 and I lose, I get the upside for the you know from 90k to 110, and then the rest of the upside is yours.
I'm kind of like giving you a share of my upside for that.
Um so if I do 3,700 twice a year, um, that's you know, seven, seven thousand two hundred four hundred dollars.
Um, and on $90,000 Bitcoin, it's like an 8% yield.
While I'm waiting too.
So that would make sense.
I guess if you're somebody who's holding Bitcoin now and you're like, okay, I plan, let's say you just take this scenario like no matter what, no matter what happens in the future, I'm selling at $110, $10K, no matter what, like that's my exit.
Then you might as well uh offer it as an option because then you'll still make that $20K bonus that you would like that upside from now.
Um then, and then you'll get an extra little bit of change on that when somebody buys that option from you, and then they can they can hold it, they can basically ride it from there.
So it's kind of like you're you're offering somebody to take over your Bitcoin in the future once it reaches a certain price, and you're giving them a uh an amount of money that they can buy that from you.
Exactly.
It's kind of like getting paid to commit to a limit sell order, right?
And have that.
Okay, that's that's perfect.
Okay, yeah, I like that.
Yeah, yeah.
So or for ETH, you know, you think it's gonna go to 10K, but you want to sell it at five, then you can sell that option too, right?
That just uh pay me X amount to buy my ETH uh at 5K, and then you'll still benefit the you know, the 60% that it's gonna go up, 66% it's gonna go up between now and then, and then and then they can that person can decide if they want to write it to $10K.
Exactly.
So you actually have a lot of like institutions who do that.
Um, like they have mandates or specific things and they have you know a billion dollars under management, and you can't earn yield on a billion dollars in too many ways.
Um there's only so much demand to borrow, you know, Bitcoin or ETH, certainly at uh any sort of competitive yield rate, you're not gonna find those borrowers paying, you know, 10, 20% to borrow Bitcoin.
Um, whereas options are kind of like this evergreen source of yield.
People will always want to take leverage uh and uh get kind of price exposure via options on the other side.
So you kind of have this nice two-way market where um, you know, this is kind of like the and it's retail too, people do sell options to generate yield.
Again, you have to know the risk you're taking, right?
The downside to the committing to a limit sell is that if Bitcoin actually goes to 50k, you're riding all of the downside with everybody else.
So it just again, you have to really think through like what am I what are my opinions on the market, what risks am I happy to take, and then make the the trade based on on kind of how you're viewing the market in your own personal sort of circumstances.
Right.
But if you're willing to ride, you know, if you're the kind of person who's like, I'm not selling until 10k and 200k, no matter what, no matter the downside.
Then this is a this, I mean, at least being the lender in a sense, or I guess is that what you would call the other side of the trade?
What do you what do you call those sides of the trade?
What it what is what's the name of each one?
You call like an option holder, I guess, if you're buying, um, and a writer, you like write calls and write, you know, uh, so you're you're writing options or selling options.
So, Nick, what calls are popular right now?
Whatever what is your options market, which is the top one uh out there.
And by open interest, you guys are seventh uh in terms of open interest right now in terms of protocols, and that includes perps, right?
So there's hyperliquid, Astor, Lighter, all the other ones, and then you guys are seventh right in there at 820 million dollars of open interest.
So there's a lot of money sitting on derive right now.
Where what is the summary of that 820 million of what people think is gonna happen?
Yeah, totally.
We've seen uh it's actually fairly mixed.
Um, with Bitcoin, I think is a very interesting state of the market right now.
Um, we've seen buyers in the 100 to 105k range in March.
So, you know, in about the next two months, people we were seeing like big buyers in that range.
We're actually seeing sellers in the 115k range, like 120k.
So we do have people overriding and selling for the yield, as we just discussed.
Volatility in general is um you know, low by historical standards in the short term for Bitcoin, like over the next month, but towards the end of the year, like the vol volatility gets higher and higher.
Um, so I think the way like I think about Bitcoin in general and trading is like, and I think it's would be reflected in a lot of options traders, is it's kind of like there's two phases that the market can be in.
There's like the current phase we're in, which is like very choppy and slow.
Um, and you know, things are moving like one percent a day, one and a half percent up and down over and over.
And then something might happen, and then the market just shifts into a completely different phase where you start to see the crazy width like five, 10% a day, um, consecutive days where it's ripping up or ripping down um all at once.
And so that's kind of what that's pricing in.
And we actually saw this with hyperliquid yesterday.
Um hyperliquid was just grinding down, grinding down for you know two, three months from $35 to $20.
And then in one day it made all that ground back up to $33.
And you know, volatility exploded and people started putting on tons of bets.
And um, you know, now the forward vol is up from you know, uh, you know, it's up like 40 or 50% on the day, which is a huge the fo the forward volatility.
Sorry, the implied, the future implied volatility.
So that's what options this is some good option trader knowledge stuff that you have that we don't know.
No, I want to know this.
This is a good metric for us to look at.
Where can I see that?
Where can I say like the implied, where can I see the implied forward volatility of something like a hyperliquid?
Yeah, you can go on to the derive website, pull up the hyperliquid options board, um, and there's a column on the options board that says, you know, the mark implied IV, which is implied volatility.
Oh, cool, you've got it here.
So if you go options, yeah.
Um you have to go to do that.
Oh, options at the top.
Okay, options at the top.
Okay.
All right.
There you go.
So click on Feb 27.
So you can see this, but it looks complicated, right?
And so we're actually working on like a some some some simpler views.
But if you look at that mark mark IV column, uh, it's it's kind of hiding there next to the strike.
Um, in the middle, right here.
Yeah, that's mark implied volatility.
Okay.
So the the very simple rule of thumb with this number is it if you divide it by 20.
This is like a rule of thumb that traders use.
Um, that is the average daily expected move over the next over this period of time.
So we've got 20 29 days.
And if you look down, if you scroll down a little bit, yeah, and scroll to the right uh as well, so we can see the mark IV.
There you go.
So like the $32 hype options are trading with a mark IV of pretty much 100%.
So you divide that by 20, that means the market is expecting 5% moves in hype every day for the next 30 days on average.
Um, so that might look like you know, like a 1% move one day and 11% move, you know, the other the next.
And um, it's pricing in a lot of volatility.
Yesterday this was like 70 vol, um 75.
So the market is thinking that hyperliquid, the token is gonna be pretty wild between now and February 27th.
Okay.
Yes, that's right.
And for point of reference, like Bitcoin, I think the mark IV um is around let's go see, you know, 40, 30, 35 to 40.
Um got it.
Yeah, okay.
Yeah, it says right here.
Yeah, okay.
So yeah, I think it's a good thing.
A short term, I guess.
Oh no, oh, on the strike down to 40.
It's a good one.
Oh, yeah, so that's probably those are not very liquid, those ones.
At the number we're at right now, yeah, it's about 35%.
Okay.
That's right.
Oh, that we gotta go.
Oh, we gotta look at ETH though.
Hold on.
Oh, 50%.
Okay.
So 50%, yeah.
Okay.
So Ethan for a bit of a bit of a wilder ride than Bitcoin in the over the next 30 days.
That's right.
Um, so like 25, 2.5% a day or something like that.
So that's generally like a rough rule of thumb for you know, kind of, and that's the I guess the differentiator with options is that it has to price these options.
There's this like crazy formula, math formula called uh black shoals, which you may have heard of, um, maybe not, but all of the other inputs are very like observable.
It's like what is the thing trading at?
How long does the option have to expire?
What's the current risk-free interest rate that the Fed is paying?
Um, and then there's this like magic term IV, which is how much do we think like as the person pricing the option, this thing is gonna move on average for the you know the period of time that the option covers.
Um, and so that is where a lot of the quant analysis and research comes in from like pricing options is looking at the historical volatility, looking into the future at like what events are coming up.
Maybe for Bitcoin, there's like an FOMC event coming up next week, um, where the Fed is setting interest rates, and there's some exposure to that.
Um, and so you would add a little bit more volatility, and so it's all forward-looking, it's into the future, it's uh not observable, and it's kind of like the game of pricing options is nailing exactly what that IV is um going forward.
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Right.
Okay.
So so I'm gonna circle back on the same question I asked you.
Looking at this, if you look at like, because you've got a week by week, and then you've got almost you have I guess you have like one week, two weeks, one month, two months, five months, seven months, or whatever.
There's different, there's different these different strike points, I guess, or what do you call that date in the future?
The the call date.
Uh expires, yeah.
Expires.
So what if I even if I wasn't actually buying or um offering options or anything like that, how would I use this board to tell me to give myself a bit of market intelligence?
Like what by looking at the ETH board right now for the next week, two weeks, three months, four months, whatever, what what am I besides just implied volatility, which you've already explained?
What else can I take from this?
Like what what what is this market of your you know $800 million of open interest?
What are they telling me when I look at this?
Yeah, so it's telling you the implied volatility, it's telling you what the distribution of uh Ethereum's prices are actually.
Like you can mathematically convert um this options board into like just a probability distribution.
Um a rough again, another rough rule of thumb, you can look at the delta um for this information.
So you can think of the delta as like a rough percentage probability that ETH finishes above at or above that price on expiry.
Um so if something is 50 delta, which is typically like around the money, so ETH said 3k, the 50 delta option is around that is the 3,000 option.
It's sort of saying, which kind of is pretty obvious to most people, that there's a 50% chance ETH finishes above 3,000 in a month, and 50% chance that it finishes below.
Um, and you can have a look at some of the other strikes.
So looking still at that Feb 27 board, there's a 10 delta the 10 delta option is roughly 3800.
So there's a 10% chance that ETH is finishing above uh 3800 in a month.
Um so yeah, if you scroll.
Oh, okay.
Yeah, you need to find the delta column, which is I think is to the left.
So you need to scroll a little bit to the left.
Uh maybe I can't go to the right.
There it is, to the right.
There it is.
Delta, okay, yeah.
Okay.
Um so here.
So if you look on the left-hand delta, um, which is on the call side.
So the calls are on the left and the puts are on the right.
You scroll down, you can see that there's a 9.09, um, which is nine delta.
That's kind of the the lingo is 0.09 is nine delta.
That's at the 3800 strike.
Um, which is showing you that there is yeah, uh roughly 9% chance we finish above that.
It's not an exact, you know, one-to-one conversion, but it's again like a rule a rule of thumb.
Okay, hold on, hold on.
Let's go see what they think in by June 26th.
Let's see if my weird act okay, oh, okay.
So okay, so there's a oh, okay, 5,000 by June 26th has a I guess a 14% chance as per this market.
This market thinks exactly right.
Yeah, okay, okay.
That's pretty good, or even 4,000 by June 26th, there's a 30% chance.
I mean, that seems kind of shit.
Yeah, yeah.
Come on, man.
Yeah, I know, I know.
Um, and like what are your people doing, Nick?
I know it.
Don't don't look below.
Look, don't look at the 2000 strike there if you if you don't want there's a 10% chance of being below 2000.
Yeah, we don't want to hear that.
Um that's just that it would hit, but that's just that it would hit that number before that date, not that it will be that number on that date, correct?
It's roughly it will be that number at that date, actually.
Okay, oh, it is okay, okay.
Yeah, um, so like again, it's it's super rough, and like those calculations don't there's some weird conditions where that doesn't isn't quite true, but in general in crypto, like that is a good rule of thumb to look at the board.
I would also say we can't we don't have the um you can go on markets if you click on the markets tab.
I think today's been a little bit of a quieter day for us, but uh yeah, there's a lot of perps in there.
But we have a sort of trade tape as well that you can subscribe to on Telegram.
And like, and this is true like for Derive.
There's a few other like big centralized exchanges like Derobit have one of these two.
And I think the other thing people can get from options, even if they never trade, is looking at the big options flows, they can really move the price of these assets.
Um, I guess I can tell a little story from a couple weeks ago.
I was speaking to a guy, I can't say who it is or what firm, but like one of the biggest options trading firms in crypto um options, like they're a trad more Trad firm.
They trade options, they're not a protocol like you.
They are actually they use Derive to do that.
Yes, yeah, okay.
Yeah, um, and he said back in 2023, he was one he was the biggest uh options trader in crypto options.
Um, and they he he claims that they had you know like 40 or 50 percent of the deribit uh, which is the biggest exchange at the time and still is for options, Bitcoin open interest when Bitcoin was at um 32,000.
And because he owned so many of these call options, it put pressure on the market, and he thinks that they were responsible for a rally from 32k to 38k, um, single-handedly.
Um, because all the other people who are short those options had to like hedge and buy back Bitcoin and it caused the price to go up.
Um and I think you've had Jeff Park on uh before, I think from Bitwise.
And uh just last week, yeah.
Yeah, and he advisor to BigWise now.
Advisor to Bitwise.
Oh, true.
He yeah, he's he's left now.
Um I think Pomp's dat, I think is where he's gonna be.
Yeah, that's right.
That's right.
Um, and he's he's super smart.
And he it's like the same thing that he's looking at.
It's like, you know, where is a lot of the open interest, which you can also see on the board in the market, where are the big trades?
Um and like who's potentially short, because you can get this dynamic where it's a bit of a it's called a gamma squeeze.
You might have heard of that um used casually, but it means effectively that like maybe someone's bought a ton of options.
Um maybe it's if someone buys a ton of Bitcoin, 100,000 strag calls, which you can view in the trade tape.
Um, it means that if we rally past 100,000, um, you might see this reflexive thing where everyone who sold those options has to buy back Bitcoin to cover to cover their short.
Um, and it becomes more and more like self-fulfilling because they're buying back Bitcoin, the price goes up, the options are worth even more, so they have to hedge even more and they have to go buy more Bitcoin.
And you get this like really reflexive um upside rip.
Uh, and you can view like big options trades and the open interest on derive, similar way we just looked at, um, also on Derabit and IBIT as well, like the uh you know traditional market, and you can really see how people are positioned.
And it will tell you, you know, like again, it can give you some insights.
Like if Bitcoin starts to move really quickly into like you know, you can reposition and figure out where things are going next.
It's not an exact science, but it knowing where those people are positioned and where those pressure points are, it can be very useful.
Nick, how have things changed in the last two weeks?
Because the thing is I I'm I'm seeing this for the first time.
So naturally, when I see that you know your market is saying that there's a 90% chance that ETH will be at 2k in six months, um, you know, that doesn't make me very happy.
But I want to above above, yeah.
Above, right?
Oh, that it'll be above 2K.
Yeah.
Oh.
10% chance it'll be below 2K in six months.
Yeah.
Oh, oh, awesome.
Okay, okay.
No, yeah, yeah, yeah.
Didn't yeah, that would be crazy.
Yeah, whatever.
Well, that's I was like, this is like a doom, I'm doom scrolling.
That would be doomed.
No, that would be now I understand.
Um, but I want to know, I guess, how reactive and predictive is is our options traders, because we've had a wild two weeks and it's gonna continue to be like this for a while, and it has been like this for a while.
This is the crypto market we're in.
But um two weeks ago, Clarity Draft comes out, we're pumping, it's gonna get passed.
Brian Armstrong says, no, No thanks.
Crypto dumps, then it's then you've got geopolitical turmoil going on, Davos last week, now who knows so much other stuff happening in the last couple days.
How much have those those calls changed in in a volatile period like that?
Like, if I looked at that same board two weeks ago, would it look similar or would it be drastically different?
And has it changed a lot since?
Actually, it would look fairly similar.
We're still very range-bound in this kind of like first paradigm that I described before, where like things are still grinding around.
Like I think we're used to, you know, even though there was a big move after like um yeah, around the Davos period from 97K down to like 90K, um, it's still very much like for Bitcoin, if you remember, like that feels like a big move to us now because if you zoom out to the last three months, it's literally done nothing.
Like this has been a really, really slow period in the market.
But on the grand scheme of things, we're still in this regime of like, you know, Bitcoin ranging by, you know, within 10 to 15 to 20 percent.
We're not seeing like a massive drawdown, like a 50% drawdown or or huge rip up to like, you know, 150k for the first time.
Um, so I would say like generally it's not been it's it's been business as usual for a lot of the options trading in the options markets.
You still have, you know, and as more and more of these institutions are coming online within iBit, within Drive, like selling options in size, you do get this dampening effect on volatility.
It uh eventually, you know, makes volatility go down, um, just from like how the the market develops and the market structure develops.
Um, and so I think that dampening with Bitcoin is just a reflection of the maturity of the asset now.
Um, but you know, if we get out of the range, kind of all bets are off, and you'll see those volatility surfaces shift very quickly.
Are you as a former like options actual trader now, somebody's been building a platform and and you know has eyes on this and talks to to people, big wallets.
Does a lot of this stuff move on technical analysis or on headline news?
Definitely not technical analysis.
Um I think like if you're trying to draw lines on a chart like these days in Bitcoin, I mean, I I I'd be skeptical if it worked like 10 years ago, but I could at least be open to the idea.
There's no way it works now.
I think the things that you know the smarter players are doing, there's a there's a mix, but one, it's just watching the flows and how people are positioned, as I said, knowing where the big trades are coming from, who the structural sort of sellers of options and volatility are in the market, like big, you know, yield generating funds with billions of dollars under mass uh under under management, what they're doing, how they're positioned in the options, who's sort of short.
Um, and then in general as well, like um it is a tough time to like trade Bitcoin.
There are, I would say like there are opportunities further down the curve in terms of like Ethereum, potentially alts for trading.
Um, but you know, it's a mix of um kind of like analysis, figuring out like building models potentially to think through like where implied volatility should be or where the price might go.
Like for you, you might look at the board and go, okay, like I don't think Bitcoin is going to be, you know, like has a 10% chance or Ethereum has a 10% chance of being below $2,000 in six months.
Like, I just don't think that's true.
You can maybe do some research, um, a little bit of math, it's easier than ever with clawed code these days, um, and kind of come to a conclusion that you might want to sell those puts um and be happy to buy at that price.
Um, and again, like I would just say it's a tough one to develop an edge in, but certainly I think just extrapolating recent price moves forward is is going to be a difficult way to develop an edge.
I have to ask you one last question, and it's about what happened on October 10th, biggest liquidations ever in crypto.
I remember seeing a tweet from one of the many analysts that I follow saying that on that day, or maybe the day before, a ton of options were expiring.
And I don't remember who it was or what they were referring to, or maybe people say that all the time, depending what desk they're looking at, but maybe you can kind of tie those together of like maybe tell me a little bit about what that means when I see something like that, and also if options were a part of that mass liquidation on 1010.
In your opinion.
I would say actually, my opinion, I don't remember seeing too much of that on 1010 specifically.
Um, sometimes with big options expires, particularly when the open interest is concentrated around the money.
So if Bitcoin's at 100k and there's like a ton of Bitcoin options that are just open at 100K expiring that day, you can see some like really pronounced moves one way or the other, like kind of in the lead up to that as people are hedging.
You get this effect where you can get these gamma hedges causing big moves.
So like that loop I told you about before, where you know Bitcoin's going above 100K.
So the people who are short have to buy more Bitcoin to cover their short.
And then that pushes the price up so they have to buy even more to cover their extra short and so on and so on.
You get this like um, you know, kind of flywheel for the price.
Um with 1010 specifically, I don't think it was related to the options.
I do think it was like bad internal systems.
And I think the reason it hit so many people so hard, it wasn't like a Bitcoin or ETH drop, it was the alts, all of like these alts that are trading, you know, with valuations that really frankly like never made sense.
Um I think what it showed was that like when some of the sort of systems in the back end and the market making agreements for these tokens aren't holding up because of structural reasons, there really aren't any bidders kind of there to back some of these tokens.
And unfortunately, a lot of people had like delta neutral positions um that were hedged across, you know, alts and you know, some of the majors.
And if one of your alts that you're you're long wakes down 85% in 10 minutes, you're you're gonna you're gonna get liquidated.
Um, and those things tend to play out and exacerbate.
Um, you know, once you get liquidated, then whoever takes on your collateral has to sell it and you get that effect to the downside and that reflexivity.
So I think it really what it did was kind of expose like if that had happened in traditional finance with equities, right?
You can imagine a world, and this has happened, there have been flash crashes.
But what happens is there's a flash crash, and you know, it's not instant liquidation, so that's a little different.
But ultimately, these companies are earning revenue, and so someone's gonna buy them, like it's gonna buy them back up to whatever their fundamental value is, and that will recover.
It might take a day or two days, but it recovers in crypto.
We didn't see that after 1010 because there are a lot of tokens out there that are trading at you know two or three billion dollars with you know ten dollars a day in revenue.
Um and that might even be generous for some of them.
So I think 1010 is actually been like a really, really good uh moment for the industry because it's better for capital allocation if capital can flow to like productive, sustainable places, and it's how we build a real financial system once you start having collateral and asset types that actually reflect economic activity.
Um, otherwise, you're just gonna continue to get the games that we've seen in 2024.
Um, we have never heard that take on the show.
1010 was good for the industry.
No one is no one has ever come on the air and said that.
That's my my hard take.
It's it's it's uh I I I really believe that.
I do.
I think it's gonna show up this year.
Okay, okay.
I like that.
Great.
Well, we'll end right there.
Nick, thanks so much for coming on.
Uh really great looking platform, man.
Uh, I don't know if I I don't I I'll have to think a little bit more and maybe learn a little bit more uh personally before I get more back in the streets.
Um, I'm very conservative these days.
But I do like this.
I like thank you for teaching me about options.
I think that's pretty cool.
I think that's good as more of a predictor than a gambler trader.
I do it is very appealing to me.
So thanks for explaining it and um best of luck with Derive Man.
Of course.
Thank you for having me on.
It's been fun.
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