The structure is complex, making it easy to misunderstand costs and risks.

Options are essentially a type of rights contract that allows one to choose whether to execute it. There are two common basic types: Call and Put options, and depending on whether you are the buyer or the seller, it forms four basic positions.

Most users who are new to the use of Options often only see the potential reward graphs, ignoring the risks behind the contracts. For example, some may mistakenly believe that by selling a Call, they can earn the premium with certainty. However, in reality, once the market surges, the seller will face the risk of theoretically unlimited losses. This risk might be managed with margin and risk control mechanisms in CEX, but in DEX (such as Dopex, Premia, Lyra), if users do not understand the risk structure themselves and invest funds into automated Vaults or write their own strategy scripts, they may encounter irretrievable losses.

Volatility estimation error

The core of the options price comes from the implied volatility (Implied Volatility, IV). Whether it’s the buyer or the seller, their rewards almost revolve around market volatility. Most players do not really understand what IV is; they just follow the price displayed by the UI to enter the market.

When the market expects volatility to be too high (for example, just before the release of CPI, approval of ETFs, black swan events, etc.), the premiums of options naturally rise. At this point, entering to buy Call or Put options becomes very expensive, and unless there is a significant price movement, it is actually quite difficult to break even. Conversely, if the market is misjudged and options are sold during low volatility, although premiums are easily collected at that moment, if an unexpected event occurs, one will instantly face losses far exceeding the original expectations.

Volatility risk is the hardest part to control in options trading, yet it is the easiest to overlook.

Expiration time and strike price selected incorrectly

In options contracts, the Strike Price and Expiration Date are two key variables that determine whether a position can turn into in-the-money or become a worthless time bubble (time value goes to zero).

One common mistake that many beginners make is being too greedy and choosing a strike price that is far out of the money (for example, if BTC is at 30,000, buying a Call with a strike at 38,000), resulting in the price only rising to 34,000 before reversing, leaving the position worthless from start to finish, ultimately going to zero; if the option purchased has too short a duration (for example, expiring in 1 day), and the market does not move immediately, it will also rapidly lose value due to time decay. This type of risk can actually be avoided through practice and reasonable valuation, but the prerequisite is to understand that the value of options is not fixed, but changes continuously with market expectations and the passage of time.

The risks of smart contracts on decentralized platforms

One of the attractions of Web3 is decentralization, but it also requires one to take responsibility for every transaction. In the DeFi space, more and more options protocols are offering automated strategy Vaults, unilateral seller pools, and even options products that combine with NFTs. While these innovations are exciting, they also come with significant technical risks.

Among the risks of smart contracts, if there are vulnerabilities in the protocol’s code itself, funds may be stolen without any operation, or liquidation failures may occur due to design flaws in the mechanism. In addition, many DEX platforms may face issues such as liquidity exhaustion and oracle mispricing during extreme market conditions (such as the week of the FTX crash, the Luna incident, and BTC flash crash), leading to price distortions of held positions and even incorrect settlements. If on-chain options tools are used, the risks of smart contracts must be included in the overall risk control considerations.

Cost of Option Premium Stacking

Many people like Options because the premium cost is fixed, and they feel the risk is controllable. However, the premium is like a chronic bleeding over time; if the strategy direction is wrong, over the long term, these costs can stack up to be quite astonishing.

Suppose you use 0.02 BTC to buy call options every week, hoping to profit from a short-term market rebound, but in reality, there is only one week with a real increase, and all other weeks result in a total loss. You may have spent 0.1 BTC, recouping your investment only once, ultimately resulting in an overall loss. This phenomenon of expecting a surge but instead suffering chronic losses is very common in options trading, especially during market consolidation or low volatility periods. For long-term operators, the risk is not a one-time explosion, but rather a model error of stable output with continuous losses.

Compliance Risk

Compliance and tax uncertainty; currently, most countries’ tax regulations on encryption assets have not clearly addressed options products, let alone on-chain derivative financial instruments. If you are a DAO member, fund operator, or individual investor, there may be retroactive tax declarations or source of funds explanations when regulatory agencies begin to focus on on-chain options trading records in the future. Especially when using high-frequency strategies or cross-chain arbitrage, the flow of funds can be difficult to track and accounting can be challenging, which will also increase the risk of being audited in the future. As long-term participants, regulatory risks should not be overlooked.

Summary

The risk of options does not lie in the tools themselves, but in the level of understanding of the tools. The pace of the Web3 world is fast and full of variables. Options provide more advanced risk control and profit strategies for this uncertainty. However, if they are merely seen as the next speculative stepping stone, it will ultimately expose oneself to even more unbearable risks.