Covered Call
Cash-covered Put
Long Call
Long Put
Naked Short Call
Naked Short Put
Long Strangle
Long Straddle
Short Strangle
Short Straddle
Short Condor
Long Condor
Short Butterfly
Long Butterfly
Long Vertical Spread
Short Vertical Spread
Long Calendar Spread
Short Calendar Spread
Long Diagonal
Short Diagonal
Ratio Spreads
The following positions will be ineligible in the TradeLayer implementation of options:
Ratio Spreads
Short Calendar Spreads
Naked Short Call
Naked Short Put
Short Strangle
Short Straddle
Short Diagonal
The following positions are known as Credit Spreads:
Short Vertical Spread
Short Butterfly
Short Condor
Here you receive some option premium (the "credit") and wait until the options become worth less as expiration approaches in order to profit. You have to margin the maximum loss on the spreads. So if you sell a Vertical, 10k BTC short call, 10.5k BTC long call, you got $250 for the 10k, paid $175 for the 10.5k, your credit is $75 worth of the underlying token, and your max loss is $500-the $75 credit, so you'd have to lock-up $425 worth of the underlying token to get into that position.
The following positions are known as Covered Writes:
Covered Call
Cash-covered Put
They call these covered writes because you short an option while providing as margin, a position in the underlying token or in its derivative. To do these you'd have to lock-up the amount of tokens or contract positions as reserve. To get the out of reserve you would have to first buy back the option you sold, then you could sell the underlying swaps or futures or get the tokens back into Available Balance to send off somewhere else or trade for something else.
The following positions are known as Debit Spreads:
Long Call
Long Put
Long Strangle
Long Straddle (these are not spreads it's just buying one or more options but ok, you pay cash money to get into these positions)
Long Condor
Long Butterfly
Long Vertical Spread
Long Calendar Spread
Long Diagonal
They call these Debit spreads because even though you may be selling some other option and getting some cash back, you are on balance out some cash money, a debit, to get into these positions. By expiration the positions will either have intrinsic value or you will have lost the premium you paid (the debit).
The rule here, is if you have 1 option contract, you can sell 1 option contract to balance against it "for free" (that is to say, without posting any more margin) as long as that contract is either:
Closer in expiration than the Option Contract you hold.
Further away in Price
Or it could be both. E.g. you are long April 10k Call and short March 10.5k Call.
Based on these logics, we lock-up the maximum possible loss for any option position. The options in TradeLayer are therefore all fully funded.
Some people want to sell options "with leverage". But options have inherent leverage. if you buy a lot of in-the-money options, you might have a low time decay and 2-5x leverage vs. just buying the underlying token with cash. If you buy a Put, you can buy futures in equal size and limit your loss to the premium paid. If you want to sell a lot of options, you can sell tons of Credit Spreads and margin up all your available capital and have a big risk/reward as expiration approaches or the market moves. So these rules are very good for both giving hedgers assurances, and for allowing people to take a lot of leverage in their options positions if they wish to do so.
The one limitation of this model vs. something a bit looser like Deribit's portfolio margin model, the mechanics of which we won't get into here, is that Deribit's model is really good for market makers who are net-short a lot of out-of-the-money options, it helps them leverage up based on statistical models or the presumption of trading swaps/futures to hedge as the market starts moving fast. However, for the sake of sanity in a decentralized protocol, where there is no centralized house willing to assume the risk of a market maker blowing up, we are willing to make this trade-off of keeping the leverage to just spreads, not to naked writes.
But who will write the furthest OTM options? People who are market makers on Deribit using their portfolio margin could be net-short over there and buy options on TradeLayer that are underwritten by people posting the full collateral, for peace of mind. It is what it is.
There are a number of possible option positions:
Covered Call Cash-covered Put Long Call Long Put Naked Short Call Naked Short Put Long Strangle Long Straddle Short Strangle Short Straddle Short Condor Long Condor Short Butterfly Long Butterfly Long Vertical Spread Short Vertical Spread Long Calendar Spread Short Calendar Spread Long Diagonal Short Diagonal Ratio Spreads
The following positions will be ineligible in the TradeLayer implementation of options:
Ratio Spreads Short Calendar Spreads Naked Short Call Naked Short Put Short Strangle Short Straddle Short Diagonal
The following positions are known as Credit Spreads:
Short Vertical Spread Short Butterfly Short Condor
Here you receive some option premium (the "credit") and wait until the options become worth less as expiration approaches in order to profit. You have to margin the maximum loss on the spreads. So if you sell a Vertical, 10k BTC short call, 10.5k BTC long call, you got $250 for the 10k, paid $175 for the 10.5k, your credit is $75 worth of the underlying token, and your max loss is $500-the $75 credit, so you'd have to lock-up $425 worth of the underlying token to get into that position.
The following positions are known as Covered Writes:
Covered Call Cash-covered Put
They call these covered writes because you short an option while providing as margin, a position in the underlying token or in its derivative. To do these you'd have to lock-up the amount of tokens or contract positions as reserve. To get the out of reserve you would have to first buy back the option you sold, then you could sell the underlying swaps or futures or get the tokens back into Available Balance to send off somewhere else or trade for something else.
The following positions are known as Debit Spreads:
Long Call Long Put Long Strangle Long Straddle (these are not spreads it's just buying one or more options but ok, you pay cash money to get into these positions) Long Condor Long Butterfly Long Vertical Spread Long Calendar Spread Long Diagonal
They call these Debit spreads because even though you may be selling some other option and getting some cash back, you are on balance out some cash money, a debit, to get into these positions. By expiration the positions will either have intrinsic value or you will have lost the premium you paid (the debit).
The rule here, is if you have 1 option contract, you can sell 1 option contract to balance against it "for free" (that is to say, without posting any more margin) as long as that contract is either:
Closer in expiration than the Option Contract you hold. Further away in Price
Or it could be both. E.g. you are long April 10k Call and short March 10.5k Call.
Based on these logics, we lock-up the maximum possible loss for any option position. The options in TradeLayer are therefore all fully funded.
Some people want to sell options "with leverage". But options have inherent leverage. if you buy a lot of in-the-money options, you might have a low time decay and 2-5x leverage vs. just buying the underlying token with cash. If you buy a Put, you can buy futures in equal size and limit your loss to the premium paid. If you want to sell a lot of options, you can sell tons of Credit Spreads and margin up all your available capital and have a big risk/reward as expiration approaches or the market moves. So these rules are very good for both giving hedgers assurances, and for allowing people to take a lot of leverage in their options positions if they wish to do so.
The one limitation of this model vs. something a bit looser like Deribit's portfolio margin model, the mechanics of which we won't get into here, is that Deribit's model is really good for market makers who are net-short a lot of out-of-the-money options, it helps them leverage up based on statistical models or the presumption of trading swaps/futures to hedge as the market starts moving fast. However, for the sake of sanity in a decentralized protocol, where there is no centralized house willing to assume the risk of a market maker blowing up, we are willing to make this trade-off of keeping the leverage to just spreads, not to naked writes.
But who will write the furthest OTM options? People who are market makers on Deribit using their portfolio margin could be net-short over there and buy options on TradeLayer that are underwritten by people posting the full collateral, for peace of mind. It is what it is.