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Weekly Digest #18

What a week with the Bitcoin flash crash after El Salvador declared Bitcoin to be legal tender. Hope everyone’s keeping well.

On our part, we have been mainly assisting with IV.Finance and hope to have it launched at the soonest possible. IV.Finance is a very well thought through product and we are looking forward to its successful launch. The success of IV.Finance will benefit $NOTION token, which in turn will benefit CODEX holders in the future after the token swap.

We seek our community’s understanding that great products are difficult to build but also worth waiting for. We hope you can be patient with us during this development period and we commit to working hard to reward those who stick around.

As we soldier on through this development phase, we will be mostly touching on IV.Finance-related matters in the coming weeks. We will first start with some options basics.

What is an Option?

An option is a contract giving the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a pre-determined price on or before a certain date. The parties to an options contract are the buyer, also called the holder, on the one hand and the seller, also called the writer, on the other.

The two most common type of option exercise are American and European. American style options can be exercised at any time prior to expiration while European Style Options can only be exercised at expiration.

For example, a $50,000 strike December 31 BTC (American style) call gives the holder the right to buy 1 BTC for $50,000 at any time up until December 31.

If the trading price of BTC (the spot) is $(50,000 + x) at any point in time before expiration, the trader will be able to buy 1 BTC for $50,000 using the call option and then immediately sell it for $(50,000 + x) on the market, locking in a profit of $ x (the payoff). In a cash-settled option as with IV.Finance options, there will be no physical delivery of the 1 BTC but instead, the trader will receive the payoff ($x) in the currency collateral (could be denominated in BTC as well).

On the other hand, if the trading price of BTC never went above $50,000 up until expiration, the trader can buy BTC on the market for a lower price than using the call. Hence, there is no way to profit using the call (payoff is $0) and the trader’s loss would be the premiums initially paid for the call option.

Features of an Option

As seen from above, the features of an option contract can be summarised as follows:

1. Premium — The consideration paid by the option buyer to the option seller for the option contract. In the case the option is not exercised, the option buyer loses the premium amount.

2. Strike Price — The price at which the option holder can buy or sell the underlying security if he or she chooses to exercise the option. The strike price is fixed throughout the duration of the option contract. It is worth highlighting that the strike price is different from the market price, which fluctuates during the life of the options contract.

3. Contract/Option Size — The deliverable quantity of the underlying asset in an options contract. If the options contract is for 1 BTC, there will be purchase or sale of 1 BTC when an option holder exercises the option contract. However for cash-settled options, which is the case for IV.Finance, there will be no actual physical delivery of the underlying asset but instead, the difference in price will be settled.

4. Expiration Date/Holding Period — The date at which the option contract expires if it is not exercised

Of course, we are not neglecting CDO.Finance as well. While efforts are being focused on IV.Finance for now, we are still working towards UI improvements for CDO.Finance.

Have a great week ahead everyone! 🙂

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