1. WTF are options?
An easy to understand thread on options🧵⬇️
#ZetaMarkets #Solana #DeFi #OptionsTrading
An easy to understand thread on options🧵⬇️
#ZetaMarkets #Solana #DeFi #OptionsTrading
2. The tldr definition is ⬇️
Options: are contracts that allow you to buy (or sell) the underlying at a predefined price and time.
Now let’s break that down 🕺🏻
Options: are contracts that allow you to buy (or sell) the underlying at a predefined price and time.
Now let’s break that down 🕺🏻
3. Options are contracts that:
Let the buyer of a call (or put), choose whether they want to buy (or sell) the underlying asset at a pre-set strike price at a pre-set expiry.
Let the buyer of a call (or put), choose whether they want to buy (or sell) the underlying asset at a pre-set strike price at a pre-set expiry.
4. Options have many use cases, some examples are portfolio hedging, price speculation, and insurance.
5. The overall gist of options is explained well by the action at expiry! Let’s take a look at a call option.
A call option gives the buyer the choice to buy the underlying asset at the time of expiry.
(continued below ⬇️)
A call option gives the buyer the choice to buy the underlying asset at the time of expiry.
(continued below ⬇️)
6. If the underlying is trading below ⬇️ the strike price, they can buy it cheaper elsewhere and will not exercise.
If the underlying is trading above ⬆️ the strike price, they are able to buy it cheaper than on the market, and will make an instant profit if they exercise!
If the underlying is trading above ⬆️ the strike price, they are able to buy it cheaper than on the market, and will make an instant profit if they exercise!
7. You can see this reflected in payoff diagrams, which are helpful charts that show the profit and loss of an option based on where the underlying asset is at expiry.
8. Long Call:
You can see that it’s at 0 at expiry if the underlying is below the strike, and begins increasing as the underlying increases above the strike price.
You can see that it’s at 0 at expiry if the underlying is below the strike, and begins increasing as the underlying increases above the strike price.
9. Long Put:
This is also the same for puts, but the payoff begins increasing as the underlying dips below the strike price.
This is also the same for puts, but the payoff begins increasing as the underlying dips below the strike price.
10. You might notice that this payoff diagram is always > or = to 0. This seems almost too good to be true as a buyer would be guaranteed to never lose if this was the case.
11. This is compensated by the option having a premium or price that is paid from buyer to seller at the time the contract is traded. We can see how the premium is reflected here in the payoff diagram👇
12. For a review of the information above, and an in-depth example of a simple use case for options, check out the video linked here 😉
13. Options are powerful tools and @ZetaMarkets is coming up with some legendary stuff so be sure to brush up on all of our content and check out our gitbook here! Mainnet is around the corner 😉
zetamarkets.gitbook.io/zeta/
zetamarkets.gitbook.io/zeta/
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