Options πŸ‘»
Being known as the most sophisticated derivative instrument, options are a powerful tool to hedge risks. Let's get started with your journey to the options universe!

Introduction to Options

If you're a newbie trader, we recommend that you start your journey with the Futures section as these two instruments have much in common ;)
Options are one of the most widely used derivatives that are based on the inherent value of an underlying asset. But unlike futures contracts, options do not impose an obligation on the buyer to execute any of the actions on the time specified. In the traditional equity market, options are universally employed as a hedging tool that may induce a lower risk exposure and operate well if utilized in tandem with spot buying or futures trading to further hedge the risk.
Though the concept may seem to be pretty sophisticated, we have a very good example that will help you understand the nature of options.
Imagine you meet a very beautiful girl and want to invite her to a restaurant. Unfortunately, she's not yet sure whether she'll be able to join you, but she is very encouraged and all. You decide to book a table in the restaurant, but it turns out that the restaurant is not engaged in free reservations and you need to pay a small amount for it. You decide to pay for the reservation, but you don't know whether you will use this opportunity or not. This way, you pay a small amount to have a 100% chance to visit this restaraunt. Options trading is absolutely same.
One more example is devoted to one of the most popular use cases of options in trading:
You're a spot trader and you buy BTC at $30K anticipating it's growth. Though, you can never be 100% sure that your prognosis is correct, so you decide to create a put option (sell) position simultaneously. This way, you hedge your losses because if the price goes down, you will be able to extract profit from the options position and this profit will compensate for the losses of your spot trade.

A few important concepts for further understanding:

    A call option gives the holder the right to buy an asset.
    A put option gives the holder the right to sell an asset.
    When you buy an option, you pay a premium for the right to trade at a set price within a predetermined time. Premium depends on volatility, execution time, and the underlying asset's price and is also an instrument to extract returns. To trade options with leverage, margin, or collateral is required.
    The strike price of an option is the price at which a put or call option can be exercised.
    Options can be of several styles with American and European being the most popular:
      A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time.
      An American option on the other hand may be exercised at any time before the expiration date.

RiskSwap's Options

The goal of the RiskSwap platform in terms of options trading is to provide a decentralized platform for their operation and to ensure a convenient and easy-to-use foundational block for well-versed, expert traders and novel traders likewise.
As in the traditional options market, the two participants of the protocol are writers of options contracts, users who sell options contracts, and those who buy options contracts. The simplified process looks as follows:
    The writer deposits collateral assets to the margin account which is a smart contract called VAULT.
    This contract allows the writer to sell options and earn premiums (note that selling options is not about the trade direction, the writer can sell both put and call options).
    Buyers of the options can purchase them on the RiskSwap exchange and sell them or exercise in case such action is profitable.
The following example will help you understand the mechanics better:
Ann writes a put option to John, which allows John to sell 1 BTC for 30,000 USDC (strike price). Ann's USDC collateral is locked in the vault. John acquired the option by buying it on RiskSwap through the Order Book. Scenario 1: Let’s say the price of BTC goes down to 25,000 USDC on the contract's expiration date. That means John’s option is now in the money and RiskSwap will automatically exercise the option by reserving 5,000 USDC from Ann’s vault for John’s vault. After the expiration date John will be able to withdraw 5,000 USDC profit from his vault. Scenario 2: Let's say the price of BTC goes up to 35,000 USDC, so the option's execution price is zero, so no funds are transferred from John to Ann and vice versa.
Now, let's shortly explain premiums. Both put and call options can be traded thus creating more space for hedging risks and speculation.
Say, Ann sold a put option to John for 1,000 USDC. As the underlying asset's price changes, both John and Ann will have some unrealized PnL, so Ann's maximum PnL will be 1,000 USDC after the settlement of the contract.
Other details are pretty similar to the ones used in futures trading.

Parameters for RiskSwap's quarterly cash-settled options: Example

Underlying asset
BTC/USD quarterly futures
BTCUSD_ddmmyy_strike_c or p
Example: BTCUSD_240921_45000_c – call option on bitcoin, with expiration date 09/24/2021, strike 45,000
Trading pair
Quantity step
Max order / Max position
100 BTC
European options, exercised at expiration. The user needs to "settle" his uPnL after the expiration.
Expiration date
Last working Friday of each quarter 03:00 UTC
Expiration price
TWAP from the price of BTCUSD quarterly futures for the period 02:00 – 03:00 UTC of the last trading day
Strike prices
When deploying a new contract, strike prices are determined from the current price of the underlying asset. New strikes are added when the price changes dramatically.
Strike price intervals
Depends on BTC price, may vary
Trading schedule
Tick size
0.01 USDC
Margin requirement
Determined by the platform depending on volatility and position size
Settlement type
Cash settlement in USDC
Taker = 0.2%, Maker = 0.1% excluding RISK staking discounts and trading volumes
Last modified 23d ago