Intro to Levana Options
What are Options and how can they be used similar to insurance?
Lesson #1: Options can be kind of like insurance
Options are a powerful financial tool that create numerous trading strategies such as insurance, hedging, farming, and leverage. Options in the crypto world have traditionally been less popular than leveraged tokens or Perps (perpetual swaps) as the educational barrier is higher. Levana Options intends to change that.
In our next few blog posts we’ll explain how options work, why they’re so powerful, and how and why they can become super valuable tools in your crypto toolbox.
Levana Options are now on our private Testnet, powered by the Juno blockchain, and fully available for you to explore and start playing with: https://options-beta.levana.finance/
Use the built-in Faucet on the markets page, to request testnet funds to get started with your first trade.
What is an Option?
An Option is a contract for purchase that gives you the right to buy or sell a stock or other assets, at an agreed price, on or before a particular date. Options are commonly used for assets like stocks, and Levana is extending this to tokens and other blockchain-based assets.
Option Contracts are transferable themselves, which means once you own an Options contract you can sell the contract P2P, and even collect a premium on it.
Understanding Option Contracts
This looks complicated, but let’s break it down…
There are two types of Options contracts, Calls and Puts.
A Call Option gives the option holder the right, but not the obligation to buy tokens at an agreed upon price, on or before a particular date.
A Put Option is the same thing, except it gives the option holder the right to sell tokens at an agreed upon price, on or before a particular date. The agreed upon price in both types of options is what is referred to as the Strike Price.
The Particular Date is what is referred to as the Options Expiration Date.
Example: Imagine a year from now that the JUNO token is trading at $120. (YAY!)
Now let’s imagine you buy a Call Option on JUNO tokens, so you’re the option holder, the Strike Price of this Call Option is $120, and expires in 30 days. Owning this Call Option allows you to purchase the amount of JUNO tokens of your Call Option, for $120, at any time during the next 30 days, no matter where the token price goes.
Happy Situation #1: You bought a Call Option and JUNO continues to climb
The JUNO token continues to climb and goes up to $135 within the next 30 days. Fortunately for you, you own a Call Option that allows you to buy the number of JUNO in your Call Option contract at $120, even though the token is currently trading at $135. You can buy at $120, and immediately sell at $135, netting an 8% return.
Happy Situation #2: You bought a Put Option and Juno goes down
Now, instead of a Call Option, imagine you bought a Put Option with a strike price of $120, that expires in 30 days. The Put Option allows you to sell the amount of Juno in your contract for $120, at any time during the next 30 days. Like a Call Option, no matter where the token price goes, your Put Option is a guarantee to sell at the price in your contract.
Why is this so great? Because, if Juno drops down to $100 per token, you own a Put Option contract that gives you the right to sell the amount of tokens in your contract for $120, even though the current market value is only $100.
Popular Use Cases for Crypto Options: Insurance like protection
Why purchase Options? First, we’ll explain some scenarios where buying a Put Option makes sense. Remember, Put Options give you the right to sell a specific amount of a specific token, at a contracted price, on or before a particular date.
Imagine you just bought your dream car (Hello Lambo), or a yacht. To protect this new car or yacht, you’re going to need insurance.
You go to an insurance provider and you purchase insurance. This financially protects your investment in a new Lamborghini Excavator in case you get into a crash, someone damages the paint, or wants a souvenir of your hubcaps . This “protection” is actually the exact same concept as Options.
Instead of a Lambo-Exca-lover, let’s imagine you are a trader of crypto, and you’ve just bought another 100 tokens of JUNO at $125 per token.
The cost of your current investment in JUNO is $12,500. We all know that token prices fluctuate, and tokens can even go to zero, like if something catastrophic happens (rhymes with TUNA). So your total risk on this JUNO investment is technically $12,500.
Now, just like we purchased insurance on the Lambo, we can easily also purchase insurance on the JUNO tokens in the form of an Option. We do this by purchasing an Option contract. In the specific example of your $12,500 of Juno tokens, purchased at $125, that we want to protect from a loss, we’d purchase a Put Option.
By definition, buying a Put Option gives you the right, but not the obligation, to sell the token at an agreed upon price, on or before a particular date.
Let’s recap. You own JUNO tokens, and you want to buy insurance on your token investment. So you buy a Put Option, giving you the right to sell a certain amount of that token, at a contracted price. Simple enough, right?
Now, if you bought a Put Option, someone had to have sold it to you, but who? The answer is any other trader who is willing to be paid to take on your risk, just like an insurance provider. In insurance, you pay a premium for someone to take on the risk for your Lambo. In Options, you pay a premium to buy an Option contract. Decentralized Insurance FTW!
That’s the basic idea of options. An investor has risk, but he’s willing to pay someone to take away his risk. And the person who gets paid then assumes the risk of price fluctuation for that investor.
Continuing with our example. You bought $12,500 worth of JUNO tokens, and you purchased a Put Option as insurance. The price of this insurance is determined by several factors, (we’ll fully explain the pricing factors in a future blog post). For now, let’s say you pay $500 for your Put Option, and it gives you full coverage insurance (with a strike price of $125 per token), for the next 30 days.
Let’s look at two different scenarios.
Scenario #1: JUNO goes up
In the first scenario, after you buy the token and the Put Option, the token price goes from $125 per token up to $132 per token. So you’ve made $7 per token on 100 tokens, totalling $700 profit on the Juno you own.
But remember, you also paid $500 for a Put Option contract, which now has no value to you. So your net profit would only be $200. At this point, you might be thinking “What a rip off!”
And the person who sold you the Put Option is saying “thanks for the cash”, because they got to keep the $500 that you paid for the “insurance” type product.
Scenario #2: JUNO goes down
But let’s look at another scenario. In this scenario, rather than the token price going up, Juno goes down to $113 per token. So the token price is now $12 cheaper than where you bought it. As you own 100 tokens, that means you’ve lost $1,200.
But thankfully, you bought a Put Option as insurance against exactly this type of token price drop. You go to the smart contract that sold you the option and say, “Hey, remember our contract? Even though the token is at $113, I’m exercising my Option to sell these tokens at $125 per token.” You lost nothing on the token, even though it dropped by almost 10%, and your only cost in this scenario is the $500 you paid for the Put Option. Much better than the $1,200 you’d have lost without the Option contract.
All of this is enforced by a decentralized on-chain smart contract. The person who sold you the Option has a binding agreement with you, enforced by that on-chain smart contract, and they are obligated to purchase your tokens from you at $125 per token. They get to keep the $500 that you paid them for the Put Option, but they’re now sitting on a $1,200 loss on the tokens they had to buy from you.
Now, they can decide to hold the tokens and hope they go back up. Or they can sell them at the current market price of $113 for a total net loss of $700.
This is a simple but useful application of Options, in real-world crypto, all powered by Juno smart contracts. Options are simply put, kind of like insurance for any type of crypto investor.
Decentralized Delicious Insurance.
Summary: Options are kind of like Insurance
These examples are only the tip of the iceberg to the rabbit hole (sorry for the mixed metaphors) that is Options trading. The best way to learn and get comfortable being on both sides of the trade, is to start playing with Options on testnet. You’re in luck, because Levana Options is now live on testnet and ready to try. Buy and sell Put Options (also known as Put Contracts) using the following tutorial.
Tutorial #1: Buy a Put on JUNO kind of like insurance if JUNO goes down.
Imagine you’ve been staking Juno, and the price ran to the Moon. Now you want to unstake, but need to wait for 28 days. While you wait, you might want a hedge on your position, so that you know you can lock in profits at the price of your choice in another month, no matter what. Waiting for the staking to unlock and guaranteeing a future sell price, is a perfect real world scenario for using Options!
Let’s do it…
Step 1: Open https://options-beta.levana.finance/
Step 2: Connect your Keplr Wallet to the Levana Testnet
Step 3: Open the Markets page, (this defaults to the Juno contracts page)
Step 4: Get some Testnet funds to play with from the Faucet, you dashing human 🤖
Note: If you can’t find the faucet button, try this link https://options-beta.levana.finance/markets
Step 5: Select to Buy a Put Option Contract
Step 6: Select which Put Option you want to buy
Note: Put contracts with higher strike prices are more expensive. Think of it like insurance, if you want to purchase more protection, or to secure a Lambo instead of a Toyota, you’ll need to pay more.
Step 7. Press the + next to the Put Option you want to buy.
Step 8: Press Continue to proceed with your order
(You’ll find this on the right side of the screen)
Step 9: Select how much you want to spend in USDC
Note: In this example, we purchased 100 USDC worth of contracts, and each contract gave us the right to sell 1 JUNO for $5.5 any time before August 27th, 2022.
Further Note: Each contract you purchase needs to first be sold by another party. In this testnet scenario, we created seller accounts that kicked off the platform by selling thousands of contracts. In Options, you can never buy more contracts than are currently available for sale.
Step 10: Approve the Tx in your Keplr wallet
That’s it!
Congratulations, you’ve just bought your first Options Contract!
You now have insurance until the end of the contract to protect your position in case Juno’s price goes down.
What’s Next?
In future blogs, we will explain more about Puts, how you can not only buy insurance, but also sell it to others, in exchange for a fee. We’ll also introduce more use cases around crypto Option trading, and how Options can be used to compliment other trading strategies.
In future posts we will also explain how Calls can be used similar to leverage and a few more fancy Options strategies.
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