Collateralized Puts refer to the practice of selling put options while simultaneously holding sufficient underlying assets or stablecoins as collateral to cover the potential exercise of the option. In crypto, this typically involves selling a put option on a digital asset, such as Bitcoin, and having an equivalent amount of USD-pegged stablecoins or the underlying crypto locked as security. The purpose is to generate income from the premium received while being prepared to acquire the underlying asset at a lower price if the option is exercised.
Mechanism
The operational flow involves a seller receiving a premium for writing a put option, obligating them to buy the underlying crypto asset at a specified strike price before or on the expiration date. To mitigate default risk, the seller’s collateral is typically held in an escrow account, a smart contract, or a centralized exchange’s margin system. If the put option expires out-of-the-money, the seller retains the premium; if it expires in-the-money, the collateral is used to purchase the underlying asset.
Methodology
The strategic approach often aligns with a neutral to moderately bullish outlook on the underlying crypto asset, as it allows for premium collection while setting a desired entry point. It represents a conservative options strategy aimed at generating yield, with the understanding that the collateral may be deployed to acquire the asset. This strategy is distinct from uncovered puts due to the explicit allocation of capital to cover the maximum potential liability, enhancing capital efficiency and risk control.
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