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Options

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!

Spin's Options

The goal of Spin 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 as well as novel traders.
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:
  1. 1.
    The writer and buyer deposit collateral assets to the margin account, a smart contract called VAULT.
  2. 2.
    This contract allows the writer to sell options and earn premiums (note that selling options are not about the trade direction, the writer can sell both - put and call options) and allows the buyer to acquire contracts. Both the seller and the buyer need to have enough collateral on their accounts.
  3. 3.
    Buyers of the options can purchase them on the Spin 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 and John's USDC collaterals are locked in the vault. John acquired the option by buying it on Spin 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 Spin will automatically exercise the option at the price of 5,000 USDC (expiration price is the strike price). But actually John earns profit gradually. As option price is going up before expiration, John's unrealized PnL also increases. After the expiration date John will be able to withdraw all his blocked collateral, plus the realized 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, meaning no funds are transferred from John to Ann and vice versa.
But this operation isn't free for John, he should pay a premium for the opportunity (but not an obligation) to sell BTC for 30,000 USDC. Let's put it like this:
Suppose that, 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. And John's maximum PnL is 30,000 USDC (if BTC price goes to 0) minus 1,000 USDC premium price.
Both put and call options can be traded thus creating more space for hedging risks and speculation.
Other details are pretty similar to the ones used in futures trading.