Opyn: DeFi’s Options Protocol

Author: Okereke Innocent
July 7, 2021

 |7 min read

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What Is Opyn?

Opyn is an Ethereum based decentralized Options trading platform, which allows you to buy, sell and create Options. It is a trustless and permissionless insurance platform that protects user’s decentralized finance (DeFi) assets from risks.  There are three categories of Opyn users which are:

  • Sellers 
  • Buyers 
  • Market makers

Basic Terms On Options Trading

To understand Opyn and how it works, you must understand some terms associated with DeFi and Options trading. Below is an explanation of the words.

What Are Options?

Options are the contract that gives you the right to buy or sell an underlying asset at a set price within a particular time frame. It is not a must to purchase or sell the underlying asset at the expiration time. You can decide to honor the contract or not.

We have two types of Options which are Call Options and Put Options. Option buyers are known as holders, while Option sellers are known as writers.

Call Options

A Call Option contract gives you the right to buy a specified asset at a set price within a particular time frame. You have a choice to either accept or not, as the contract does not make it compulsory for you to buy at the expiration time. A Call Option could be a Call Option buyer or a Call Option seller.

Call Option Buyers

A Call Option buyer is also known as a “Call Holder”. As a call holder, you can decide to exercise the right to buy an Option contract or not. To have the right to buy, you will pay a fee to the Option seller called the Premium.

Call Option Sellers

A Call Option seller is also known as a “Call Writer”. As a call writer, you must sell an Option contract to the buyer if he or she exercises the right to buy at the strike price. 

Put Option

A Put Option contract gives you the right to sell a specified asset at a set price within a particular time frame. You have a choice to either sell or not, as the contract does not make it compulsory for you to sell at the expiration time. A Put Option could be a Put Option buyer or a Put Option seller.

Put Option Buyer

A Put Option buyer is also known as a “Put Holder”. As a put holder, you have the right to sell an Option contract but are not obligated to do it. You can decide to exercise your right to sell or not. 

Put Option Seller

A Put Option Seller is also known as a “Put Writer”. As a put writer, you do not have an obligation to buy the underlying asset at the strike price. 

Premium 

The money an Option buyer pays to the Option seller to buy a contract is called a Premium. It is the income a seller gets for selling a contract. 

Bid Price

The “Bid price” is when a buyer is willing to pay a specific price to own an Option contract. 

Ask Price

The “Ask Price” is the price at which a seller accepts to sell an Option contract. The money you are willing to pay to buy an option contract is the premium.

Strike Price

When exercised, the price at which a seller can sell an Option contract or buy an Option contract is the strike price.

In The Money (ITM)

This term is different for both the Call Option and the Put Option. For the Call Option, ITM is when the current price of an underlying asset is greater than the strike price. While for the Put Option, ITM is when the current price of an asset is lower than the strike price.

Out Of The Money (OTM)

For a Call Option, OTM refers to the position where the strike price is greater than the current price for an asset. While for a Put Option, OTM is when the strike price is lower than the current price for an underlying asset.

At The Money (ATM) 

ATM is the same for both Put and Call Options. It refers to the position where the price of an underlying asset is the same as the strike price.

Example To Explain Options

Rich wants to sell 1 ETH for 3,000 USDT before 10 am on May 28, 2021. Stone is willing to buy 3,000 USDT for 1 ETH at Rich’s request. Rich pays Stone 5 USDT for having the right but not the obligation to sell his ETH. After the expiry date of May 28, 2021, Stone must buy from Rich if he decides to sell. If Rich doesn’t sell, he only loses 5 USDT and keeps his 1 ETH while Stone keeps his 3,000 USDT plus the 5 USDT. 

In the above example, 

  • Rich is the Option holder.
  • Stone is the Option writer.
  • ETH is the underlying asset.
  • USDT is the strike asset.
  • 3,000 USDT is the strike price.
  • 5 USDT is the Premium.
  • If, Rich sells his 1 ETH to Stone for 3,000 USDT on May 28, 2021. The Option is exercised.
  • If Rich exercises his Option before the expiry date, this is known as America style option. If Rich can only exercise his Option precisely at the time of expiration, this is known as a European style Option.

Reasons For Using Option

The reasons for using Options differ for people. People use Options basically for:

  1. Risk management: People use Options to reduce losses that can occur from volatile assets such as ETH. 
  2. Income generation: When an Option expires, it becomes worthless. The worthlessness results in income generation.
  3. Speculation:  A user can predict the future price of an asset. The prediction can help an Option holder not invest a large percentage of their money in the asset but still profit if the Option closes in the money.

Step By Step Guide For Using The Opyn Platform

  1. Download a wallet such as Metamask and register.
  2. You have a phrase seed while registering, ensure you keep it well because that is the only way you can access your wallet during a loss.
  3. After registering, click on dApps in Metamask wallet.
  4. Search for Opyn.co.
  5. Click on the icon at the top right corner.
  6. You should connect your wallet, select Metamask from the Options to allow Opyn to have access to your wallet.
  7. A dropdown menu shows on the top left corner of the screen. Select the Options you want to perform and the expiration date you want for your Options.
  8. For instance, if you selected the Buy Call Option. 
  9. Choose your preferred strike price.
  10. Type your position size in the order box.
  11. Select the approve USDC button and confirm your selection. 
  12. Then, select buy oToken and confirm your selection. 
  13. Select done.
  14. Go to your dashboard to verify your trade.
  15. You just bought a Call Option.
  16. The same steps above apply for buying a Put Option. 

To sell Call Options and sell Put Options, you should follow the steps below:

  1. Follow the steps above from one to seven.
  2. Select a sell Put Option, for instance.
  3. Select your preferred strike price.
  4. Enter your position size in the order box.
  5. Select approve wETH (Wrapped Ethereum) button, and confirm your selection.
  6. The wETH serves as collateral for the trade.
  7. Select the issue oToken button, and confirm your selection.
  8. Then, select the approve oToken button, and confirm your selection. 
  9. Select sell oToken and confirm your selection.
  10. Go to your dashboard to verify your trade.
  11. The same steps above apply for selling a Call Option.

How To Reduce Or Cancel A Trade Before Expiration

  1. Locate your Opyn dashboard.
  2. Select the position you want to close on the active positions tab.
  3. Input the oToken quantity you wish to reduce or cancel.
  4. Click on “Buy Back” and confirm.
  5. In the close position box, input the oToken quantity again.
  6. Click “Burn and Withdraw” and confirm.
  7. Use Etherscan to ensure your transaction.

Conclusion

Opyn is an Ethereum based decentralized, trustless, and permissionless Options trading platform, which allows you to buy, sell and create Options. It is flexible, secured, and easy to use for three categories of users – sellers, buyers, and market makers to ensure against financial and technical risk in a DeFi, and also help users generate income.

With Opyn, you can buy and sell a call option, or buy and sell a put option. To start trading options using Opyn, you can use the guide in the article.

Also, read about Hegic Protocol.

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