Option contracts
Basics
- From DeFi Weekly (10-4-2020):
"Options are similar to forwards and futures, except that the buyer has the RIGHT but no an OBLIGATION to purchase the asset at a date in the future.
Depending on who has the optionality at the time of expiry, we call it a put or call.
- Calls are the right to acquire an asset at a certain price in the future
- Puts are the right to sell an asset at a certain price in the future
Example 1: I buy a call option for $155 with the strike price being $150. That means that if the price of ETH goes to $200, I can acquire ETH for $150 and profit $45 (not $50 because I paid a $5 premium for the call).
Example 2: I buy a put option for $155 with the strike price being $150. That means that if the price of ETH goes to $100, I can sell ETH for $150 and profit $45 (not $50 because I paid a $5 premium for the put)
Because the counter-party of the option is giving the right, but not obligation, to the seller - they charge a premium. Futures/forwards don't impose this premium since both parties have an obligation at the time of expiry."
"Options are known as derivatives because they derive their value from an underlying asset."
- A simple explainer video can be seen here (1-9-2018).
Type of options
- There are two main terms used to describe the different types of option exercise:
- European Style Options: can be exercised only at expiration.
- American Style Options: can be exercised at any time prior to expiration.
"Cash settlement means that option holders don’t have to provide the underlying asset in order to exercise. Rather, the options are settled in the collateral asset, and option holders receive a cash payout on exercise (difference in value between strike and underlying asset price in terms of the strike asset) is transferred."
- There are also many so called 'spreads'. Examples are Bull Spread, Bear Spread, Butterfly Spread and the Box Spread.
Projects
- From DeFi Weekly (10-4-2020):
"The first use cases of options are insurance, although it's now shifting to price speculation as well. Three contenders make up this space at the moment:
In essence, Opyn is an options protocol that started off with selling puts to provide insurance against users losing stable coins deposited to DeFi protocols. The idea is simple, a put seller will sell the right to claim $1 for $1.05. This means that you're effectively paying 5% for insurance. Since then Opyn has moved into selling generalised options for price speculation.
Nexus Mutual's core value proposition is insurance, however it acts like an options protocol, except you don't have the right to exercise your options. What does that mean? Well NXM is the native token of Nexus Mutual and is a claim over the capital in the pool. All the capital in excess of the amount to make payouts according to their prediction model is owned by NXM holders. In this sense you're purchasing an option but NXM token holders have the right to determine whether to pay you out or not. Of course it's in Nexus Mutual's best interest that they pay out when hacks happen, although the subjectivity of hacks is up to NXM holders at the end of the day. I'd be expecting Nexus Mutual insurance to become cheaper in the future.
Hegic is also another options protocol, however what makes it unique is the fact that it's run by an anonymous founder by the handle 0mollywint3ermutz. The site is pretty primitive, contracts are in beta, however I wanted to mention it since this will be a project to keep your eyes on due to the lack of legal boundaries this can go. Options for securities and other risky assets, I'm sure Hegic will happily do something as risky as that.
Other honourable mentions:
- Ohmydefi - still in beta but launching soonish"
