Understanding Perpetual Vaults in DeFi: Structured Products with Underlying Options Strategies

This post was originally published on Opyn

Wade Prospere

Sep 29 · 23 min read

Table of Contents:

Intro

Selling Covered Call Options vs. Selling Put Options

Covered Call Strategies in Action

Put Selling Strategies in Action

Key Option Terms

Intro

The purpose of this article is to make structured products in DeFi easier to understand. Specifically, I’ll talk about perpetual vaults that use underlying options strategies to generate yield. As Julian Koh showed in his origins of DeFi yield article, “instead of [low yield] lending, one of the most lucrative ways of earning yield on assets like ETH or BTC is through option writing strategies.”

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Options can seem complex. There are multiple strikes, expiries, and combinations that active traders need to consider. Additionally, the gas fees associated with frequently rolling options can significantly eat into profits. Like user behavior with liquidity mining, most DeFi users prefer to deposit and forget (vs. an always on, active trading strategy). Structured products are one way to automate different strategies to make it easier for users to trade options. Taking it a step further, perpetual vaults are a type of structured product that automate options strategies in perpetuity. In other words, DeFi users only need to deposit funds and the vault will automatically trade the options strategy outlined by the smart contract. Another benefit of this type of vault is that gas is socialized across all vault depositors, dramatically reducing the cost of managing ongoing options strategies.

For the sake of this article, I’ll focus on perpetual vaults that SELL options (also called writing). The primary purpose of selling options is to generate yield for your portfolio. All options expire. The closer they get to their expiration date, the more their value declines. This time decay is known as theta. By selling options, traders profit from the option’s decay in value, with the goal of the option expiring worthless (out-of-the-money) each period.

Selling Covered Call Options vs. Selling Put Options

To refresh, let’s look at the two most popular option writing strategies: selling covered calls and selling puts.

Selling a covered call option:

  • By selling a call option, you have the obligation to deliver the asset (e.g. ETH) at a predetermined price (strike price) to the option buyer if they exercise the option
  • A covered call is an options strategy used to generate yield (income) when traders believe the underlying asset price is unlikely to rise above the strike price before the expiration date
  • A covered call is constructed by holding an asset (e.g. ETH) and then selling (writing) call options on that same asset, representing the same size as the underlying long position. For example, if you own 1 ETH, you can sell 1 covered call option. Owning the underlying asset is necessary because selling naked call options (not owning the underlying asset) exposes the options writer to unlimited risk.
  • A covered call will limit the trader’s potential upside profit, capping gains above the strike price. For example, if you sell a call option with a strike price of $2,000, you are giving away profit of the underlying asset above $2,000.
  • The goal of selling a covered call option is for the option to expire worthless, allowing the trader to earn the option’s premium while keeping 100% of the underlying asset as collateral
Covered Call Payoff Diagram

Selling a put option:

  • By selling a put option, you have the obligation to buy the asset (e.g. ETH) at a predetermined price (strike price) from the option buyer if they exercise the option
  • Selling a put is an options strategy used to generate yield (income) when traders believe the underlying asset price is unlikely to fall below the strike price before the expiration date
  • Note that the writer of a put option will lose money on the trade if the price of the underlying asset drops below the strike price at expiration
  • The goal of selling a put option is for the option to expire worthless, allowing the trader to earn the option’s premium while keeping 100% of their collateral
Selling a Put Option Payoff Diagram

Perpetual Vaults: Automated Theta Decay Strategies

h/t to Julian Koh, Ken Chan and the Ribbon Finance team for being the first to launch structured Products in DeFi.

Covered Call Strategies in Action

Ribbon Finance: ETH Covered Call Vault (T-ETH-C)

Vault Link: T-ETH-C

Vault Strategy:

The vault earns yield on its ETH deposits by running a weekly automated ETH covered call strategy. The vault reinvests the yield earned back into the strategy, effectively compounding the yields for depositors over time.

  • Vault goal: Earn high yield from selling ETH call options
  • Ideal market condition: This strategy is ideal for flat, down, and moderately rising market conditions. The best-case scenario is for ETH to rise, but stay below the strike price each week so the options expire out-of-the-money. If the options expire out-of-the-money, vault depositors earn yield from option premiums and also keep 100% of their ETH collateral.
  • Vault risk: The main risk for users in a covered call perpetual vault is if the call options expire in-the-money (the price of ETH is above the option strike price at expiry), resulting in a loss for the week. In the event that the options expire in-the-money, the loss is equal to the difference between the strike price and the settlement price. Vault depositors keep the yield from option premiums, but the loss incurred is taken from the ETH collateral deposited.

Vault Flow:

1. User deposits ETH in the ETH Covered Call Vault (T-ETH-C)

The vault receives ETH from depositors and invests 100% of its ETH balance in its weekly options strategy.

2. Vault algorithmically selects strike price and expiry

The vault algorithmically selects the optimal strike price for the WETH call options. The algorithm selects a strike price high enough so that with reasonable market movements, the options will expire worthless and vault depositors keep 100% of their underlying collateral.

3. Vault mints WETH call options

Every Friday at 11am UTC, the vault mints European WETH call options by depositing its WETH balance as collateral in an Opyn vault. The vault sets the strike price to the value determined by its selection algorithm and the expiry date to the following Friday. In return, the vault receives oTokens from the Opyn vault, each of which represent an WETH call option.

4. Vault sells options via Gnosis Auction

The vault sells the newly minted options via a Gnosis batch auction. The vault first sets a minimum price for the options and then opens up bidding to anyone in the world. Participants whose bid is greater than or equal to the final clearing price receive the auctioned oTokens.

Ribbon Finance: ETH Covered Call Vault Flow

Scenario 1: Options Expire Out-of-the-money (OTM)

At expiry, if the strike price is higher than the settlement price of ETH, the options expire out-of-the-money. In this situation the oTokens held by the option buyers expire worthless.

5. Collateral returned to the vault

When the call options expire out-of-the-money, the WETH used to collateralize the options in the Opyn vault is returned back to the Ribbon vault.

Scenario 2: Options Expire In-the-money (ITM)

6. Strike price is below settlement price, and the options are exercised

At expiry, if the strike price is lower than the settlement price of ETH, the options expire in-the-money.

When the call options expire in-the-money, the option holders will exercise their options. The options are cash-settled, so for each options contract, option buyers can withdraw the difference between the settlement price of ETH and the strike price at expiry. For example, if the strike price of the call option is $2,000, and the settlement price of ETH is $2,100, The option holders can withdraw $100 from the vault (difference between strike & settlement price). Any ETH left over is returned to the Ribbon vault.

Stake Dao: Active ETH Covered Call Strategy (Active ETH CC Strategy)

Vault Link: Active ETH CC Strategy

Vault Strategy:

The vault earns yield on its ETH deposits by running a weekly automated ETH covered call strategy. The vault uses yield-generating collateral, allowing users to generate passive income on deposits. User ETH deposits are automatically deposited into the Curve sETH-ETH pool (eCRV). Additionally, the vault reinvests the yield earned from selling call options back into the strategy, compounding the yields for depositors over time.

  • Vault goal: Earn high yield from selling ETH call options and generate passive income on collateral
  • Ideal market condition: This strategy is ideal for flat, down, and moderately rising market conditions. The best-case scenario is for ETH to rise, but stay below the strike price each week so the options expire out-of-the-money. If the options expire out-of-the-money, vault depositors earn yield from option premiums and deposits, while keeping 100% of their ETH collateral.
  • Vault risk: The main risk for users in a covered call perpetual vault is if the call options expire in-the-money (the price of ETH is above the option strike price at expiry), resulting in a loss for the week. In the event that the options expire in-the-money, the loss is equal to the difference between the strike price and the settlement price. Vault depositors keep the yield from option premiums, but the loss incurred is taken from the ETH collateral deposited.

Vault Flow:

1. User deposits ETH in the Stake Dao Active ETH Covered Call Strategy (Active ETH CC Strategy)

The vault receives ETH from depositors and automatically deposits ETH into Curve’s sETH-ETH pool (eCRV). That pool’s LP shares are deposited into Stake Dao’s Passive ETH Strategy. The LP token from Stake Dao’s strategy is called sdecrv which is the collateral to sell options. The vault invests 100% of these funds in its weekly strategy.

2. Vault manager selects strike price and expiry

Based on the amount of ETH deposited into Stake Dao’s Passive ETH Strategy (sdecrv) from the Active ETH CC Strategy, the Stake Dao team sells 10% Delta ETH options to market makers (10% Delta corresponds to a strike price generally around 25% above the current ETH market price). This strike price is high enough so that with reasonable market movements, the options will expire worthless and vault depositors keep 100% of their underlying collateral.

3. Vault mints ETH call options

Every Saturday, the vault mints European ETH call options by depositing sdecrv as collateral in an Opyn vault and setting a strike price (selected by the manager) and expiry date (the following Friday). In return, the vault receives oTokens from the Opyn vault which represent the ETH call options.

4. Vault sells options to market maker

The vault sells the newly minted options to market makers for a fee (the market price of the option, also known as the option premium) — the sale is done OTC via Airswap. The fee earned by the vault is paid in WETH and represents the yield on this strategy.

Stake Dao: Active ETH Covered Call Strategy (Active ETH CC Strategy) Vault Flow

Scenario 1: Options Expire Out-of-the-money (OTM)

At expiry, if the strike price is higher than the settlement price of ETH, the options expire out-of-the-money. In this situation the call options held by the market makers expire worthless.

5. Collateral returned to the vault

When the call options expire out-of-the-money, the sdecrv used to collateralize the options in the Opyn vault is returned back to Stake Dao’s Passive ETH Strategy vault.

Scenario 2: Options Expire In-the-money (ITM)

6. Strike price is below settlement price, and market maker exercises

At expiry, if the strike price is lower than the settlement price of ETH, the options expire in-the-money.

When the call options expire in-the-money, the market makers will exercise their options. The options are cash-settled, so for each option contract, market makers can withdraw the difference between the settlement price of ETH and the strike price. For example, if the strike price of the call option is $2,000, and the settlement price of ETH is $2,100, The market makers can withdraw $100 from the vault (difference between strike & settlement price). Any sdecrv left over is returned to Stake Dao’s Passive ETH Strategy vault.

Ribbon Finance: BTC Covered Call Vault (T-WBTC-C)

Vault Link: T-WBTC-C

Vault Strategy:

The vault earns yield on its WBTC deposits by running a weekly automated WBTC covered call strategy. The vault reinvests the yield earned back into the strategy, effectively compounding the yields for depositors over time.

  • Vault goal: Earn high yield from selling WBTC call options
  • Ideal market condition: This strategy is ideal for flat, down, and moderately rising market conditions. The best-case scenario is for BTC to rise, but stay below the strike price each week so the options expire out-of-the-money. If the options expire out-of-the-money, vault depositors earn yield from option premiums and also keep 100% of their BTC collateral.
  • Vault risk: The main risk for users in a covered call perpetual vault is if the call options expire in-the-money (the price of BTC is above the option strike price at expiry), resulting in a loss for the week. In the event that the options expire in-the-money, the loss is equal to the difference between the strike price and the settlement price. Vault depositors keep the yield from option premiums, but the loss incurred is taken from the BTC collateral deposited.

Vault Flow:

1. User deposits WBTC in the WBTC Covered Call Vault (T-WBTC-C)

The vault receives WBTC from depositors and invests 100% of its WBTC balance in its weekly options strategy.

2. Vault algorithmically selects strike price and expiry

The vault algorithmically selects the optimal strike price for the WBTC call options. The algorithm selects a strike price high enough so that with reasonable market movements, the options will expire worthless and vault depositors keep 100% of their underlying collateral.

3. Vault mints WBTC call options

Every Friday at 11am UTC, the vault mints European WBTC call options by depositing its WBTC balance as collateral in an Opyn vault. The vault sets the strike price to the value determined by its selection algorithm and the expiry date to the following Friday. In return, the vault receives oTokens from the Opyn vault, each of which represent an WBTC call option.

4. Vault sells options via Gnosis Auction

The vault sells the newly minted options via a Gnosis batch auction. The vault first sets a minimum price for the options and then opens up bidding to anyone in the world. Participants whose bid is greater than or equal to the final clearing price receive the auctioned oTokens.

Ribbon Finance: BTC Covered Call Vault (T-WBTC-C) Vault Flow

Scenario 1: Options Expire Out-of-the-money (OTM)

At expiry, if the strike price is higher than the settlement price of BTC, the options expire out-of-the-money. In this situation the oTokens held by the option buyers expire worthless.

5. Collateral returned to the vault

When the call options expire out-of-the-money, the WBTC used to collateralize the options in the Opyn vault is returned back to the Ribbon vault.

Scenario 2: Options Expire In-the-money (ITM)

6. Strike price is below settlement price, and the options are exercised

At expiry, if the strike price is lower than the settlement price of BTC, the options expire in-the-money.

When the call options expire in-the-money, the options buyers will exercise their options. The options are cash-settled, so for each options contract, option buyers can withdraw the difference between the price of BTC at expiry and the strike price. For example, if the strike price of the call option is $50,000, and the settlement price of BTC is $51,000, The option buyers can withdraw $1,000 from the Opyn vault (difference between strike & settlement price). Any WBTC left over is returned to the Ribbon vault.

Stake Dao: Active BTC Covered Call Strategy (Active BTC CC Strategy)

Vault Link: Active BTC CC Strategy

Vault Strategy:

The vault earns yield on its crvRenWSBTC or WBTC deposits by running a weekly automated BTC covered call strategy. The vault uses yield-generating collateral, allowing users to generate passive income on deposits. User deposits are automatically deposited into the Curve renBTC+wBTC+sBTC Pool pool (sBTC). Additionally, the vault reinvests the yield earned from selling call options back into the strategy, compounding the yields for depositors over time.

  • Vault goal: Earn high yield from selling BTC call options and generate passive income on collateral
  • Ideal market condition: This strategy is ideal for flat, down, and moderately rising market conditions. The best-case scenario is for BTC to rise, but stay below the strike price each week so the options expire out-of-the-money. If the options expire out-of-the-money, vault depositors earn yield from option premiums and keep 100% of their BTC collateral.
  • Vault risk: The main risk for users in a covered call perpetual vault is if the call options expire in-the-money (the price of BTC is above the option strike price at expiry), resulting in a loss for the week. In the event that the options expire in-the-money, the loss is equal to the difference between the strike price and the settlement price. Vault depositors keep the yield from option premiums, but the loss incurred is taken from the BTC collateral deposited.

Vault Flow:

1. User deposits crvRenWSBTC or WBTC in the Stake Dao Active BTC Covered Call Strategy (Active BTC CC Strategy)

If the vault receives WBTC from depositors:

  • WBTC is deposited into the Curve renBTC+wBTC+sBTC Pool pool (sBTC). This gives crvRenWSBTC.
  • The crvRenWSBTC is then deposited into Stake Dao’s Passive BTC Strategy, which gives sdcrvRenWSBTC.
  • 100% of the sdcrvRenWSBTC funds are used as collateral to sell options weekly

If the vault receives crvRenWSBTC from depositors:

  • The crvRenWSBTC is deposited into Stake Dao’s Passive BTC Strategy, which gives sdcrvRenWSBTC.
  • 100% of the sdcrvRenWSBTC funds are used as collateral to sell options weekly

2. Vault manager selects strike price and expiry

Based on the amount of BTC deposited into Stake Dao’s Passive BTC Strategy (sdcrvRenWSBTC) from the Active BTC CC Strategy, the Stake Dao team sells 10% Delta BTC options to market makers (10% Delta corresponds to a strike price generally around 25% above the current BTC market price). This strike price is high enough so that with reasonable market movements, the options will expire worthless and vault depositors keep 100% of their underlying collateral.

3. Vault mints BTC call options

Every Saturday, the vault mints European BTC call options by depositing sdcrvRenWSBTC as collateral in an Opyn vault and setting a strike price (selected by the manager) and expiry date (the following Friday). In return, the vault receives oTokens from the Opyn vault which represent the BTC call options.

4. Vault sells options to market maker

The vault sells the newly minted options to market makers for a fee (the market price of the option, also known as the option premium) — the sale is done OTC via Airswap. The fee earned by the vault is paid in WBTC and converted to sdcrevRenWSBTC and represents the yield on this strategy.

Stake Dao: Active BTC Covered Call Strategy (Active BTC CC Strategy) Vault Flow

Scenario 1: Options Expire Out-of-the-money (OTM)

At expiry, if the strike price is higher than the settlement price of BTC, the options expire out-of-the-money. In this situation the call options held by the market makers expire worthless.

5. Collateral returned to the vault

When the call options expire out-of-the-money, the sdcrvRenWSBTC used to collateralize the options in the Opyn vault is returned back to Stake Dao’s Passive BTC Strategy vault.

Scenario 2: Options Expire In-the-money (ITM)

6. Strike price is below settlement price, and market maker exercises

At expiry, if the strike price is lower than the settlement price of BTC, the options expire in-the-money.

When the call options expire in-the-money, the options buyers will exercise their options. The options are cash-settled, so for each options contract, option buyers can withdraw the difference between the price of BTC at expiry and the strike price. For example, if the strike price of the call option is $50,000, and the settlement price of BTC is $51,000, The option buyers can withdraw $1,000 from the Opyn vault (difference between strike & settlement price). Any sdcrvRenWSBTC left over is returned to Stake Dao’s Passive BTC Strategy vault.

Put Selling Strategies in Action

Ribbon Finance: yvUSDC ETH Put Selling Vault (T-YVUSDC-P-ETH)

Vault Link: T-YVUSDC-P-ETH

Vault Strategy:

The yvUSDC ETH Put Selling Vault (T-YVUSDC-P-ETH) earns yield on USDC deposits by running a weekly automated ETH put-selling strategy. Put options are collateralized by yvUSDC. The vault reinvests the yield it earns back into the strategy, compounding the yields for depositors over time.

  • Vault goal: Earn high yield from selling ETH put options and generate passive income on collateral
  • Ideal market condition: This strategy is ideal for flat, up, and moderately falling market conditions. The best-case scenario is for ETH to stay flat or rise. If the options expire out-of-the-money, vault depositors earn yield from option premiums and keep 100% of their USDC collateral.
  • Vault risk: The main risk for users in a put writing perpetual vault is if the put options expire in-the-money (the price of ETH is below the option strike price at expiry), resulting in a loss for the week. In the event that the options expire in-the-money, the loss is equal to the difference between the strike price and the settlement price. Vault depositors keep the yield from option premiums, but the loss incurred is taken from the USDC collateral deposited.

Vault Flow:

  1. User deposits USDC in the T-YVUSDC-P-ETH vault:

DeFi users deposit USDC in the T-YVUSDC-P-ETH vault. The vault invests 100% of these funds in its weekly strategy.

2. Vault deposits USDC in Yearn:

Every Friday, the vault converts 100% of its USDC balance into yvUSDC by depositing USDC into the Yearn USDC yVault. By converting USDC into yvUSDC, the vault gains exposure to the yield generated by the Yearn yVault.

3. Vault algorithmically selects strike price and expiry

The vault algorithmically selects the optimal strike price for the WETH put options. The algorithm selects a strike price low enough so that with reasonable market movements, the options will expire worthless and vault depositors keep 100% of their underlying collateral.

4. Vault mints ETH put options

Every Friday at 11am UTC, the vault mints European WETH put options by depositing its yvUSDC balance as collateral in an Opyn vault. The vault sets the strike price to the value determined by its selection algorithm and the expiry date to the following Friday. In return, the vault receives oTokens from the Opyn vault, each of which represent a WETH put option.

5. Vault sells options via Gnosis Auction

The vault sells the newly minted options via a Gnosis batch auction. The vault first sets a minimum price for the options and then opens up bidding to anyone in the world. Participants whose bid is greater than or equal to the final clearing price receive the auctioned oTokens. The fee earned by the vault in USDC and represents the primary source of yield on this strategy (the secondary source is the yield generated by holding yvUSDC).

Ribbon Finance: yvUSDC ETH Put Selling Vault (T-YVUSDC-P-ETH) Vault Flow

Scenario 1: Options Expire Out-of-the-money (OTM)

At expiry, if the strike price is lower than the settlement price of ETH, the options expire out-of-the-money. In this situation the put options held by the option holders expire worthless.

6. Collateral returned to the vault

When the put options expire out-of-the-money, the yvUSDC used to collateralize the options in the Opyn vault is returned back to the Ribbon vault.

Scenario 2: Options Expire In-the-money (ITM)

7. Strike price is above market price, and the options are exercised

At expiry, if the strike price is higher than the settlement price of ETH, the options expire in-the-money.

When the put options expire in-the-money, the option holders will exercise their options. The options are cash-settled, so for each options contract, option holders can withdraw the difference between the price of ETH at expiry and the strike price. For example, if the strike price of the put option is $2,000, and the settlement price of ETH is $1,900, The option holders can withdraw $100 from the vault (strike — settlement price). Any yvUSDC left over is returned to the Ribbon vault.

Ribbon Finance: USDC ETH Put Selling Vault (T-USDC-P-ETH)

Vault Link: T-USDC-P-ETH

Vault Strategy:

The USDC ETH Put Selling Vault (T-USDC-P-ETH) earns yield on its USDC deposits by running a weekly automated ETH put-selling strategy. Put options are collateralized by USDC. The vault reinvests the yield it earns back into the strategy, effectively compounding the yields for depositors over time.

  • Vault goal: Earn high yield from selling ETH put options
  • Ideal market condition: This strategy is ideal for flat, up, and moderately falling market conditions. The best-case scenario is for ETH to stay flat or rise. If the options expire out-of-the-money, vault depositors earn yield from option premiums and keep 100% of their USDC collateral.
  • Vault risk: The main risk for users in a put writing perpetual vault is if the put options expire in-the-money (the price of ETH is below the option strike price at expiry), resulting in a loss for the week. In the event that the options expire in-the-money, the loss is equal to the difference between the strike price and the settlement price. Vault depositors keep the yield from option premiums, but the loss incurred is taken from the USDC collateral deposited.

Vault Flow:

  1. User deposits USDC in theUSDC ETH Put Selling Vault (T-USDC-P-ETH)

DeFi users deposit USDC in theT-USDC-P-ETH vault. The vault invests 100% of these funds in its weekly strategy.

2. Vault algorithmically selects strike price and expiry

The vault algorithmically selects the optimal strike price for the WETH put options. The algorithm selects a strike price low enough so that with reasonable market movements, the options will expire worthless and vault depositors keep 100% of their underlying collateral.

3. Vault mints ETH put options

Every Friday at 11am UTC, the vault mints European WETH put options by depositing its USDC balance as collateral in an Opyn vault. The vault sets the strike price to the value determined by its selection algorithm and the expiry date to the following Friday. In return, the vault receives oTokens from the Opyn vault, each of which represent a WETH put option.

4. Vault sells options via Gnosis Auction

The vault sells the newly minted options via a Gnosis batch auction. The vault first sets a minimum price for the options and then opens up bidding to anyone in the world. Participants whose bid is greater than or equal to the final clearing price receive the auctioned oTokens. The fee earned by the vault in USDC and represents the primary source of yield on this strategy.

Ribbon Finance: USDC ETH Put Selling Vault (T-USDC-P-ETH) Vault Flow

Scenario 1: Options Expire Out-of-the-money (OTM)

At expiry, if the strike price is lower than the settlement price of ETH, the options expire out-of-the-money. In this situation the put options held by the option holders expire worthless.

5. Collateral returned to the vault

When the put options expire out-of-the-money, the USDC used to collateralize the options in the Opyn vault is returned back to the Ribbon vault.

Scenario 2: Options Expire In-the-money (ITM)

6. Strike price is above settlement price, and the options are exercised

At expiry, if the strike price is higher than the settlement price of ETH, the options expire in-the-money.

When the put options expire in-the-money, the option holders will exercise their options. The options are cash-settled, so for each options contract, option holders can withdraw the difference between the price of ETH at expiry and the strike price. For example, if the strike price of the put option is $2,000, and the settlement price of ETH is $1,900, The option holders can withdraw $100 from the vault (strike — settlement price). Any USDC left over is returned to the Ribbon vault.

Key Option Terms:

  • Option: Options are financial instruments that are derivatives based on the value of underlying assets such as ETH or BTC. An options contract offers the buyer the opportunity to buy (calls) or sell (puts) the underlying asset.
  • European Settlement: An options contract that can only be exercised at expiration. Exercising a call or put option will only take place on the date of the option’s expiration.
  • Cash Settlement: A cash-settled option is a type of option whereby settlement results in a cash payment, instead of settling in the underlying asset. The cash payment is equal to the option’s intrinsic value at the time it’s exercised. Opyn v2 is cash settled.
  • Call Option: A call option is a financial contract that gives the option buyer the right, but not the obligation, to buy an asset at a specified price for a specific amount of time.
  • Put Option: A put option is a financial contract that gives the option buyer the right, but not the obligation, to sell an asset at a specified price for a specific amount of time.
  • Option Buyer: The person who buys an option by paying a premium. This person has the right, but not the obligation, to exercise the option. Also known as an options “holder,” or someone who is “long” an option.
  • Option Seller: The person who sells an option in return for a premium. The option seller is obligated to perform when the buyer exercises their right under the option contract.
  • Collateral: Collateral refers to an asset given as security by the options seller in order to hedge the credit risk of the options transaction.
  • Underlying: The underlying asset on which an option’s value is based. It is the primary component of how an option gets its value. Options are classed as derivatives because they derive their value from the performance or price action of an underlying asset.
  • Premium: The money paid upfront by the option buyers to the option sellers in return. It is the cost of the option.
  • Strike Price: A strike price is the set price at which an options contract can be bought or sold when it is exercised. For call options, the strike price is the price an asset can be bought; for put options, the strike price is the price at which the asset can be sold.
  • Expiration date: The date when the options contract becomes void. For European options, it’s the due date for options buyers to exercise the options contract. For American options, it’s the date by which options buyers must exercise the options contract.
  • Exercise: To exercise means to put into effect the right to buy or sell the underlying asset at the strike price. If the holder of a put option exercises, they will sell the underlying asset. If the holder of a call option exercises, they will buy the underlying asset.
  • At-The-Money (ATM): A call or put option is at-the-money when its strike price is the same as the current underlying asset price.
  • In-The-Money (ITM): Refers to an option that possesses intrinsic value. A call contract is in the money when its strike price is less than the current underlying asset price. A put contract is in the money when its strike price is greater than the current underlying asset price.
  • Out-of-The-Money (OTM): An option that only contains extrinsic value. A call option is out of the money when its strike price is greater than the current underlying asset price. A put option is out of the-money when its strike price is less than the current underlying asset price
  • Time value: The value of an option based on the amount of time before the contract expires
  • Intrinsic value: The in the money portion (if any) of a call or put contract’s current market price. Intrinsic value is a measure of what an option is worth

Typical options syntax is: Asset Name — Expiration Date — Strike Price — Option Type, e.g. ETH Dec 15 500 Call

Building Perpetual Vaults:

Recently, we launched Opyn’s Developer Toolkit, a suite of resources to make it easier for developers to build options products in DeFi. We’ve been protocol-first for a while and we want to improve the developer experience even more!

Have questions? Comments? We’d love to get your feedback, so please hop into the Opyn discord, we’re happy to answer qs in #dev.

Opyn Community

At Opyn we value our community and we strongly encourage anyone to contribute in improving Opyn. There are several ways you can contribute:

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