What Are DeFi Options and How to Trade Them
A complete guide to decentralized options trading — what they are, why they matter, and how to get started.
Options are one of the most powerful financial instruments in traditional markets, with an estimated 137 billion contracts traded globally in 2023 alone. Now, decentralized finance is bringing that same power to crypto— without the gatekeepers, approvals, or custodial risk of centralized platforms.
If you've been trading spot or perps and want to level up your toolkit, DeFi options are worth understanding. This guide covers what they are, how they work under the hood, and how you can start trading them today.
What Makes DeFi Options Different?
DeFi options work on the same principles as traditional options, but they operate on blockchain infrastructure through smart contracts instead of centralized exchanges. This creates several important differences:
No intermediaries. In traditional finance, options trading requires a broker, a clearinghouse, and often pre-approval based on your net worth and trading experience. DeFi options are executed directly through smart contracts — code handles the creation, settlement, and clearing of every contract.
Permissionless access. DeFi options platforms are generally open to anyone with a crypto wallet. There's no KYC requirement, no minimum account balance, and no geographic restrictions (beyond what individual protocols enforce). You don't need to be an "approved options trader."
24/7 availability. Unlike traditional markets that trade during set hours, DeFi options markets operate around the clock. Prices are updated algorithmically or by market makers who quote continuously.
Self-custody. Your assets remain in your own wallet or in a non-custodial smart contract throughout the trade. You're not trusting a centralized entity with custody of your funds.
Transparency. Every option contract, its parameters, and its settlement are visible on-chain. You can verify the state of any position at any time.
Programmability. Because DeFi options are smart contracts, developers can compose them with other protocols to create structured products, automated strategies, and yield-generating vaults that would be difficult or impossible in traditional markets.
How DeFi Options Work Under the Hood
When you trade a DeFi option, here's what typically happens:
You connect your wallet to a DeFi options protocol and deposit collateral (usually a stablecoin like USDC, or the underlying asset like ETH).
You select your trade. Choose the underlying asset (BTC, ETH, etc.), whether you want a call or put, the strike price, and the expiration date.
The smart contract creates the option. Based on your inputs, the protocol prices the option using its pricing model (often a variant of Black-Scholes adapted for crypto) or via market makers who provide quotes.
You pay the premium. The premium is locked by the smart contract.
At expiration (or earlier, depending on the protocol), the contract settles. If the option is "in the money" (profitable), the smart contract automatically calculates and distributes the profit. If it's "out of the money," the premium is forfeited.
Different protocols handle this flow in different ways. Some use an automated market maker (AMM) where you trade against a liquidity pool. Others use an order book model where market makers quote prices and you trade against them directly. The order book approach generally offers tighter spreads and better pricing for larger trades.
Why Trade DeFi Options?
There are four core use cases that drive options trading, and all of them apply in DeFi:
Hedging. If you hold a large ETH or BTC position, you can buy put options as insurance against a price drop. If the market falls, your puts increase in value, offsetting losses on your underlying holdings. This is the equivalent of buying insurance for your portfolio.
Speculation with defined risk. Buying a call option on an asset you're bullish on gives you leveraged exposure — a small price move in the underlying can produce a large percentage gain on your option. Unlike perps, your maximum loss is limited to the premium you paid. No liquidation risk.
Income generation. If you already hold crypto, you can sell (write) covered call options against your position. You collect premiums from buyers, generating yield on your holdings. This "covered call" strategy is one of the most popular options strategies in both traditional and DeFi markets, with annualized premiums often ranging from 7–15% depending on volatility.
Volatility trading. Options give you the ability to trade volatility itself, not just price direction. Strategies like straddles and strangles profit when the market makes a big move in either direction — something uniquely suited to crypto's volatile nature.
The DeFi Options Landscape in 2026
The DeFi options market is still small relative to centralized options trading. Deribit (now owned by Coinbase) dominates centralized crypto options with roughly 85% market share, processing over $1 trillion in total volume in 2024 alone. DeFi options protocols account for less than 1% of total crypto options volume — but that gap is closing.
Several protocols have emerged as leaders in the space:
Derive (formerly Lyra) is the leading onchain options protocol, built on Ethereum using the OP Stack. Derive pioneered the options AMM model and has since evolved into a full-featured exchange with an order book, portfolio margin, cross-margin, multi-asset collateral, and support for options, perpetuals, and structured products. The protocol crossed $100 million in TVL and has processed over $1.5 billion in notional volume. Derive supports options on BTC, ETH, and a growing list of altcoins including HYPE.
Opyn was one of the first DeFi options protocols on Ethereum, introducing oTokens (ERC-20 tokens representing options positions) and the concept of "perpetual options" with their Squeeth product.
Aevo operates a hybrid model with an off-chain order book and on-chain settlement, focusing on a CEX-like trading experience in a decentralized wrapper.
Panoptic takes a different approach, building perpetual, oracle-free options on top of Uniswap V3 liquidity positions.
How to Start Trading DeFi Options: Step by Step
Here's how to get started, using Derive as an example (though the general flow is similar across protocols):
Step 1: Set up a wallet. You'll need a Web3 wallet like MetaMask, Rabby, or Coinbase Wallet. Make sure it's funded with the collateral you plan to use (USDC, ETH, wBTC, etc.).
Step 2: Connect to the protocol. Visit the protocol's web app (e.g., app.derive.xyz) and connect your wallet. No account creation or KYC is required.
Step 3: Deposit collateral. Transfer your assets into the protocol's smart contract. On Derive, a Standard Margin subaccount is created automatically on your first deposit.
Step 4: Navigate to the options chain. You'll see available strike prices and expiration dates laid out in an options chain — similar to what you'd see on a traditional brokerage. Each cell shows the current bid and ask price for that specific option.
Step 5: Place your trade. Select the option you want (call or put, strike price, expiry), choose your order size, and submit. On order book-based protocols, you can place limit orders for better pricing.
Step 6: Monitor and manage. Track your positions, Greeks (delta, gamma, theta, vega), and P&L in the protocol's interface. You can close positions before expiry or let them settle automatically.
Pro tip: If you plan to trade spreads, covered calls, or other multi-leg strategies, look for protocols that offer Portfolio Margin — this significantly reduces collateral requirements by recognizing the hedged nature of your positions.
Risks to Understand
DeFi options trading carries real risks that you should understand before committing capital:
Smart contract risk. Your funds are held in smart contracts. If there's a bug or exploit, you could lose your deposit. Stick to audited, battle-tested protocols.
Liquidity risk. DeFi options markets are still developing. Spreads can be wider than on centralized exchanges, especially for less liquid assets or far-dated expiries. This means you may pay more to enter and exit positions.
Volatility risk. Crypto markets are extremely volatile. While options cap your downside when buying, selling options exposes you to potentially unlimited losses (for uncovered positions).
Complexity. Options are inherently more complex than spot or perp trading. Understanding Greeks, volatility surfaces, and multi-leg strategies takes time. Start small, paper trade if possible, and build your knowledge gradually.
Oracle and pricing risk. Some protocols rely on price oracles to settle options. Oracle manipulation or delays can affect settlement accuracy, though leading protocols have robust safeguards against this.
The Bottom Line
DeFi options represent one of the largest untapped opportunities in crypto. The total notional value of global options traded annually exceeds $1 quadrillion — and DeFi currently captures a tiny fraction of even the crypto options market. As protocols mature, liquidity deepens, and more traders discover the benefits of onchain options, this space is poised for significant growth.
Whether you're looking to hedge existing positions, speculate with defined risk, or generate yield on your holdings, DeFi options give you tools that simply didn't exist in crypto a few years ago — all without giving up custody of your assets.
The best way to learn is to start. Pick a protocol, deposit a small amount, and make your first trade. The options chain might look intimidating at first, but once you execute a few trades, the mechanics become intuitive fast.