A simple guide for simple folks on how to trade Options on gas price
This guide explains how you can hedge yourself against gas price fluctuations through buying “call options” on Opium Exchange.
A common use-case for trading financial instruments to hedge risk
High gas prices caused by network congestion can have a huge impact on both dApp developers and frequent Ethereum users. This risk can easily be lowered by trading options; a financial instrument that follows the gas price. Trading options will not directly influence the gas price itself, but can significantly compensate the trader when they are right.
Here is a detailed guide for simple folks on how to hedge yourself against high gas prices by trading Options.
Think about it as insurance you can buy to protect yourself or your project against gas price fluctuations.
Buying a “call option” is a way to insure yourself against high gas prices. Currently, there is a contract with a strike price of 35 gwei for 1 gas, meaning 35 gwei is a predicted average of gas price fluctuations over a week. This contract grants the right to buy 10’000’000 gas for 0,35 WETH (35 gwei each). You think that the average of this week will be higher than 35 gwei. In this case, buying Call Option suits your needs. Let’s forget for a moment about the price of the contract and move to the end of the week.
Scenario 1: High gas prices! (You can see it on figure 1)
You were right, gas prices were crazy and the average was 45 gwei. Since you bought a call option based on 35 gwei gas price and the gas price has since increased to 45 gwei, your call option will net you 0.1 WETH profit (minus the price of the contract).
Scenario 2: Relatively low gas price.
(You can see it on figure 2)
You were wrong and it was a pretty quiet week for gas prices and the average was, imagine, 15 gwei. Since the actual gas price turned our lower than the gas price your call option was based on, you will not “exercise” the option. Similar to a health insurance contract, you won’t be using the option since you are healthy and don’t need medical services. In this scenario, the options trader incurs a small loss by paying the contract cost.
“What about the price of such an option contract? How much should you pay for it?”
There is no correct answer because:
Opium exchange does not set prices for the options contracts; the market decides. Using the order book, you can always see how much other users are willing to pay or receive for such a contract.
Currently, the lowest price available for this call option contract is 0.232 WETH. There are 3 contracts available at this price. In case you want to buy more of these options contracts, you can buy another 3 contracts at the price of 0.233.
Of course, if you think this price is unfair, you can always set your price by creating a new buy or sell order.
Just write your price while placing the order and it will go to the order book to wait for a counterparty that will be willing to sell for your price.
Here you can see other buy orders and prices they are willing to pay for such a contract. Meaning the highest price is currently 0.011 WETH for this contract.
Payout guarantees
To prevent tail-risks, all our primitive derivatives like options on gas price have a fixed initial margin. It means that all your gain or loss is capped by the initial margin that seller and buyer lock by placing the order.
In the case of a Call option on gas price, only the seller has to lock some amount of tokens as the initial margin. To prevent fat-fingers please pay attention to this information on Opium Exchange dashboard.
Where can I buy it?
You can buy Call Option on gas price on Opium Exchange. More information about the contracts you can read here.
Opium Team is a small team of professional traders, mathematicians, and programmers with a ton of experience in their field. Big parts of economies are in the hands of centralized agents that exploit their positions. We are convinced that they are not necessary any longer. We designed the Opium Protocol to ensure transparent, fair, and open financial markets.
Feel free to drop us any questions or your feedback in Opium Telegram group. Chat us also if you need help with building derivatives on top of Opium Protocol.
Stay tuned and follow Opium on Twitter ❤
