How to Trade DeFi Options: Opyn v2 Tutorial

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Opyn

20 min readDec 29, 2020

After Opyn v1 laid the foundation for DeFi options as the first live ERC20 options protocol, Opyn v2 launches the Gamma Protocol and an intuitive options interface. The Gamma Protocol is the most powerful, capital efficient DeFi options protocol. This will be a step by step tutorial on how to trade options with the Opyn v2 interface, followed by an overview of the new features made possible by the Gamma Protocol, and a glossary of important terms.

To trade options with Opyn, users need the following:

Metamask — A cryptocurrency wallet which can be used on Chrome, Firefox and Brave browsers. It’s also a browser extension. This serves as the bridge between normal browsers and the Ethereum blockchain, enabling the Opyn v2 app to connect to your wallet.
USDC and/or ETH

It’s important to note that this is a step by step guide for the processes in place at v2 launch (12/29/20), and the Opyn team will continue to work on ways to reduce the amount of steps it takes to trade options using the Opyn v2 dashboard. The tutorial will be updated accordingly.

Step by Step Guide:

Step 1. Go to Opyn.co

Step 2. Click on the Launch App button in the top right corner.

Step 3. Click on the Connect Wallet button in the top right corner to connect the Opyn app with MetaMask, select your MetaMask account then click connect.

Step 4. Select your preferred Options Series from dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu.

Step 5. Decide your options strategy:

Buy a Call Option
Buy a Put Option
Sell a Call Option
Sell a Put Option
Create Call Debit Spread
Create Call Credit Spread
Create Put Debit Spread
Create Put Credit Spread

Buy Call

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Price
Scroll down below the options section and enter your position size in the order box
Select the Approve USDC button, and confirm with MetaMask. This step authorizes the Opyn platform to use your USDC for the trade. Note, this action only needs to be taken once
Select the Buy oToken button, and confirm with MetaMask. This step purchases your oToken(s)
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Long Call Basics:

With call options, the strike price represents the predetermined price at which a call buyer can buy the underlying asset.

The call buyer has the right to buy ETH at the strike price for a set amount of time. For that right, the call buyer pays a premium. If the price of ETH moves above the strike price, the option will be worth money (it will have intrinsic value). The buyer can exercise the option at expiry in order to receive a cash settlement from the option seller.

Buy Put

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Price
Scroll down below the options section and enter your position size in the order box
Select the Approve USDC button, and confirm with MetaMask. This step authorizes the Opyn platform to use your USDC for the trade. This action only needs to be taken once
Select the Buy oToken button, and confirm with MetaMask. This step purchases your oToken(s)
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Long Put Basics:

With put options, the strike price represents the predetermined price at which a put buyer can sell the underlying asset.

The put buyer has the right to sell ETH at the strike price for a set amount of time. For that right, the put buyer pays a premium. If the price of ETH moves below the strike price, the option will be worth money (it will have intrinsic value). Opyn will auto-exercise the option at expiry if it is in the money.

Sell Call

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Price
Scroll down below the options section and enter your position size in the order box
Select the approve WETH Wrapper button, and confirm with MetaMask. This step approves the Opyn platform to wrap your ETH, which will be used as collateral for the trade. This action only needs to be taken once
Select the Issue oToken button, and confirm with MetaMask. This action issues your oTokens for the selected options series
Select the Approve oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Sell oToken button, and confirm with MetaMask. This action sells your minted oToken on 0x
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Short Call Basics

In exchange for selling a call option, the call writer receives the premium (the option’s price). Writing call options allows sellers to generate income. It’s important to note that the income from writing a call option is limited to the premium, while a call buyer theoretically has unlimited profit potential.

A short call is a bearish trading strategy, reflecting a bet that the underlying asset of the option will fall in price. With a short call, there is unlimited risk exposure during the length of time the option is viable, so max loss is infinite.

Sell Put

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Price
Scroll down below the options section and enter your position size in the order box
Select the Approve Collateral button, and confirm with MetaMask. This step allows the Opyn platform to approve your collateral for the trade. This action only needs to be taken once
Select the Issue oToken button, and confirm with MetaMask. This action issues oTokens for the selected options series
Select the Approve oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Sell oToken button, and confirm with MetaMask. This action sells your minted oToken on 0x
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Short Put Basics:

In exchange for selling the put option, the put writer receives the premium (the option’s price). Writing put options allows sellers to generate income. It’s important to note that the income from writing a put option is limited to the premium, while a put buyer can maximize profit until the asset, e.g. ETH, goes to zero.

Call Debit Spread

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Prices
Scroll down below the options section and enter your position size in the order box
Select the Approve USDC button, and confirm with MetaMask. This step authorizes the Opyn platform to use your USDC for the trade. This action only needs to be taken once
Select the Buy oToken button, and confirm with MetaMask. This step purchases your oTokens
Select the Approve Long oToken button, and confirm with MetaMask. This step approves the long oToken be used in the spread
Select the Create Spread button and confirm with MetaMask. This step places the long oToken into a vault that will be used to collateralize the short oToken
Select the Approve oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Sell oToken button, and confirm with MetaMask. This action sells your minted oToken on 0x
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Call Debit Spread Basics:

A Call Debit Spread, also known as a bull call spread, is an option strategy involving the simultaneous buying and selling of options of the same class with different prices, requiring a net outflow of cash. The result is a net debit to the trading account.

The Call Debit Spread reduces the cost of the call option, but it caps the gains in the asset’s price, creating a limited range where the trade can earn a profit. Traders often use a bull call spread if they believe an asset will moderately rise in value. This happens most often during times of high volatility.

The Call Debit Spread involves two call options, resulting in a net debit to the trading account:

Buying a call option (long call) for a strike price above the current market with a specific expiration date and pay the premium
Simultaneously, selling a call option (short call) at a higher strike price that has the exact same expiration date as the first call option

Call Credit Spread

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Prices
Scroll down below the options section and enter your position size in the order box
Select the Buy oToken button, and confirm with MetaMask. This step purchases your oTokens
Select the Approve USDC button, and confirm with MetaMask. This step authorizes the Opyn platform to use your USDC for the trade. This action only needs to be taken once
Select the Approve Long oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Create Spread button, This step places the long oToken into a vault that will be used to collateralize the short oToken
Select the Approve oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Sell oToken button, and confirm with MetaMask. This action sells your minted oToken on 0x
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Call Credit Spread Basics:

A Call Credit Spread, also known as a bear call spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset. The call credit spread is achieved by purchasing call options at a specific strike price while also selling the same number of calls with the same expiration date, but at a lower strike price. The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade.

A call credit spread is considered a limited-risk and limited-reward strategy. Traders can contain their losses or realize reduced profits by using this strategy. The limits of profits and losses are determined by the strike prices of the particular call options.

Put Debit Spread

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Prices
Scroll down below the options section and enter your position size in the order box
Select the Buy oToken button, and confirm with MetaMask. This step purchases your oTokens
Select the Approve USDC button, and confirm with MetaMask. This step authorizes the Opyn platform to use your USDC for the trade. This action only needs to be taken once
Select the Approve Long oToken Button, and confirm with MetaMask. This step approves the long oToken be used in the spread
Select the Create Spread button, and confirm with MetaMask. This step places the long oToken into a vault that will be used to collateralize the short oToken
Select the Approve oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Sell oToken button, and confirm with MetaMask. This action sells your minted oToken on 0x
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Put Debit Spread Basics:

A Put Debit Spread, also known as a bear put spread, is an options strategy where a trader expects a moderate decline in the price of an asset. A put debit spread is achieved by purchasing put options while also selling the same number of puts on the same asset with the same expiration date at a lower strike price. The result of this trade is a net debit to the Opyn trading account. The sum of all options sold (lower strike price) is lower than the sum of all options purchased (higher strike price), therefore the trader must put up money to begin the trade.

This strategy nets a profit when the price of the underlying security declines. The maximum profit in a put debit spread is equal to the difference between the two strike prices, minus the net cost of the options.

Put Credit Spread

Select your preferred Options Series from the dropdown in the top left corner of the screen and select the desired Expiry Date from the dropdown menu
Select your preferred Strike Prices
Scroll down below the options section and enter your position size in the order box
Select the Approve USDC button, and confirm with MetaMask. This step authorizes the Opyn platform to use your USDC for the trade. This action only needs to be taken once
Select the Buy oToken button, and confirm with MetaMask. This step purchases your oTokens
Select the Approve Long oToken button, and confirm with MetaMask. This step approves the long oToken be used in the spread
Select the Create Spread button, and confirm with MetaMask. This step places the long oToken into a vault that will be used to collateralize the short oToken
Select the Approve oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Sell oToken button, and confirm with MetaMask. This action sells your oTokens on 0x
Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Put Credit Spread Basics:

A Put Credit Spread, also known as a bull put spread, is an options strategy that a trader uses when they expect a moderate rise in the price of the underlying asset. The put credit spread strategy employs two put options to form a range, consisting of a high strike price and a low strike price. The trader receives a net credit from the difference between the two premiums from the options.

The maximum loss is equal to the difference between the strike prices and the net credit received. The maximum profit, which is the net credit, only occurs if the asset’s price closes above the higher strike price at expiry.

How to reduce or close out your position prior to expiry

To close out or reduce your short position prior to expiry, go to your Opyn Dashboard and do the following:

On the Active Positions tab, select the position you would like to reduce or close out
Scroll down to the Close Position box, located below the Active Positions section
Enter the oToken amount to reduce or fully close out your position, then click “Buy Back” and confirm with MetaMask. This action buys back your minted oTokens from 0x contract
Re-enter the same oToken amount in the close position box, then click “Burn and Withdraw” and confirm with MetaMask. This action burns your oTokens and redeems your collateral. This action needs to be taken in order to reduce or close out your position.
Confirm the transaction on Etherscan.

To close out or reduce your long position prior to expiry, go to your Opyn Dashboard and do the following:

On the Active Positions tab, select the position you would like to reduce or close out
Scroll down to the Sell oTokens box, located below the Active Positions section
Enter the options amount to sell or fully close out your position, then click “Submit Sell Order” and confirm with MetaMask. This action sells your minted oToken(s) on 0x
Confirm the transaction on Etherscan

How does auto-exercise work?

The protocol now has auto-exercise for in the money options, so option holders don’t need to take action before or at expiration. Upon expiry, proceeds for long and short option holders are calculated and can be redeemed at any point after the proceeds have been finalized with a settlement price.

At the time of expiry, Chainlink nodes provide a live ETHUSD price to the Chainlink aggregator. Opyn’s contracts have a short locking period as it takes a short amount of time for the Chainlink oracle price for the expiry time of the options to be available. After the locking period has passed, an oracle price can be submitted. After a price has been submitted, there is a dispute period in which the price can be disputed. If the price is disputed, the disputer can update with a new price. After the dispute period has passed, the settlement value of options are finalized and users can redeem option proceeds or settle their vaults.

The locking period and dispute time periods are different for different assets. Currently WETH-USDC options are available on Opyn v2. For WETH-USDC options, the locking period is 5 minutes and the dispute period is 2 hours. So while the options all expire at 8:00 UTC and are settled with the price of the underlying at 8:00 UTC, users can start to redeem at 10:05 UTC.

How to redeem

To redeem, go to your Opyn Dashboard and do the following:

On the Expired Positions tab, select the position you would like to redeem
Scroll down to the Redeem Balance / Expired Tokens box, located below the Expired Positions section
Select the Redeem / Redeem Payout button, and confirm with MetaMask
View closed positions in the closed positions tab or Etherscan

Improved Opyn v2 Features & Capabilities

Opyn v2 dramatically improves user experience and creates the most powerful, capital efficient options protocol in DeFi by introducing the following features:

Margin improvements (spreads!)
European, cash-settled options
Auto-exercise for in the money options upon expiry
Earn yield (& gov tokens) on collateral
Call options without multipliers
Operators to allow contracts to act on a user’s behalf
Oracle used for option settlement price
Flash mints
Deterministic option contract addresses, names, symbols
Anyone can create new options if the product has been whitelisted

Margin Improvements

Gamma Protocol lays the foundation for more capitally efficient options starting with spreads. Spreads allow long oTokens to collateralize short oTokens, enabling users to post the max loss of a structure as collateral.

European, cash-settled options

Gamma Protocol moves to cash-settled, European options to enable margin improvements by allowing for safe constructions of spreads. European options mean that option holders can exercise options only upon expiry.

Cash settlement means that option holders don’t have to provide the underlying asset in order to exercise. Rather, the options are settled in the collateral asset, and option holders receive a cash payout on exercise (difference in value between strike and underlying asset price in terms of the strike asset) is transferred.

Auto-exercise for In The Money options upon expiry

Gamma Protocol now has auto-exercise for in the money options, so option holders don’t need to take action before or at expiration. Upon expiry, proceeds for long and short option holders are calculated and can be redeemed at any point after the proceeds have been finalized with a settlement price.

Earn yield (& gov tokens) on collateral

Gamma Protocol now allows for yielding assets (eg. cTokens, aTokens, yTokens) to be used as collateral for options, and allows for farmers to harvest earned and airdropped Tokens (eg. COMP with cToken collateral). The first options launched are USDC collateralized, but in the next few months, we will release options with yielding collateral.

Call options without multipliers

Gamma Protocol allows for call options without any multipliers so 1 call option oToken will correspond to 1 unit of the underlying asset (eg. 1 call oToken on 1 ETH will correspond to 1 call option on 1 ETH)

Operators to allow contracts to act on a user’s behalf

Operators are a smart contract feature that allow users to delegate control of their vaults to a third party smart contract. This could be a smart contract that rolls over user options on their behalf, a fund manager to execute trades on behalf of a user, or a vast amount of other interactions that developers can build on top of the protocol.

Oracle used for option settlement price

Cash settlement requires an oracle to determine the payout at expiry. The Gamma Protocol architecture is generalizable to allow for different oracles for different assets.

ETH-USDC options collateralized with USDC are already available at Opyn, and these will use the Chainlink oracle to get the ETH price. There are no liquidations needed as max loss is posted as collateral.

Flash mints

Since vault collateralization is checked at the end of a transaction, it’s possible to mint options without collateral as long as they are burned before the end of the transaction.

Deterministic option contract addresses, names, symbols

Gamma Protocol allows for specific oToken details to determine the address, name and symbols and each oToken. For example, the symbol for a 300 strike WETH put option expiring on December 25th, 2020 would have the following symbol: oWETHUSDC/USDC-25DEC20–300P

Anyone can create new options if the product has been whitelisted

A product is a combination of specifying the underlying asset, strike asset, and collateral asset for an option and whether it’s a call or a put. For any of these whitelisted products, anyone can create a new option, specifying the strike and expiry. Expiration times are currently fixed to 8AM UTC to prevent fragmentation of liquidity across a variety of expirations within the same day.

0x Exchange

Gamma Protocol’s options (oTokens) are ERC20s tokens, so they can be traded on any decentralized exchange that follows the ERC20 standard.

The Opyn interface is using 0x Exchange to trade options (oTokens), enabling users to trade using the 0x Order Book.

Glossary of Terms

Option: Options are financial instruments that are derivatives based on the value of underlying assets such as ETH or BTC. An options contract offers the buyer the opportunity to buy (calls) or sell (puts) the underlying asset.
European Settlement: An options contract that can only be exercised at expiration. Exercising a call or put option will only take place on the date of the option’s expiration.
American Settlement: An options contract that allows holders to exercise the option at any time before, and including, the day of expiration.
Physical Settlement: Physically settled options are options contracts whereby settlement requires the actual physical delivery of the underlying asset.
Cash Settlement: A cash-settled option is a type of option whereby settlement results in a cash payment, instead of settling in the underlying asset. The cash payment is equal to the option’s value at the time it’s exercised.
Call Option: A call option is a financial contract that gives the option buyer the right, but not the obligation, to buy an asset at a specified price for a specific amount of time.
Put Option: A put option is a financial contract that gives the option buyer the right, but not the obligation, to sell an asset at a specified price for a specific amount of time.
Option Buyer: The person who buys an option by paying a premium. This person has the right, but not the obligation, to exercise the option. Also known as an options “holder,” or someone who is “long” an option.
Option Seller: The person who sells an option in return for a premium. The option seller is obligated to perform when the buyer exercises their right under the option contract.
Collateral: Collateral refers to an asset given as security by the options seller in order to hedge the credit risk of the options transaction.
Underlying: The underlying asset on which an option’s value is based. It is the primary component of how an option gets its value. Options are classed as derivatives because they derive their value from the performance or price action of an underlying asset.
Premium: The money paid upfront by the option buyers to the option sellers in return. It is the cost of the option.
Bid: The price a buyer is willing to pay for the option. If you’re selling an option, this is the premium you’d receive for the contract.
Ask: The price a seller is willing to accept for the option. If you want to buy an option, this is the premium you’d pay.
Strike Price: A strike price is the set price at which an options contract can be bought or sold when it is exercised. For call options, the strike price is the price an asset can be bought; for put options, the strike price is the price at which the asset can be sold.
Expiration date: The date when the options contract becomes void. For European options, it’s the due date for options buyers to exercise the options contract. For American options, it’s the date by which options buyers must exercise the options contract.
Exercise: To exercise means to put into effect the right to buy or sell the underlying asset at the strike price. If the holder of a put option exercises, they will sell the underlying asset. If the holder of a call option exercises, they will buy the underlying asset.
At The Money (ATM): A call or put option is at-the-money when its strike price is the same as the current underlying asset price.
In The Money (ITM): Refers to an option that possesses intrinsic value. A call contract is in the money when its strike price is less than the current underlying asset price. A put contract is in the money when its strike price is greater than the current underlying asset price.
Out of The Money (OTM): An option that only contains extrinsic value. A call option is out of the money when its strike price is greater than the current underlying asset price. A put option is out of the-money when its strike price is less than the current underlying asset price
Time value: The value of an option based on the amount of time before the contract expires.
Intrinsic value: The in the money portion (if any) of a call or put contract’s current market price. Intrinsic value is a measure of what an option is worth.
Volume: The number of contracts traded that day.
Open interest: The number of options contracts currently in play.
Delta (Δ): Sensitivity of an option’s price to the underlying asset price. Delta explains how an option will react if the price of the underlying asset goes up. For example, a long call on WETH is a bet that WETH will go up. The Delta tells us how strong this relationship is, quantitatively. I.e. a .5 delta means a call goes up $.50 for every $1 increase in WETH.
Gamma (Γ): Sensitivity of delta to the underlying asset price. Gamma explains convexity, or the slope of delta. It is the derivative of delta, expressing how delta changes as the price of the underlying goes up.
Theta (Θ): Sensitivity of an option’s price as time passes. Theta tells us how an option’s price changes as time goes by. All options eventually expire. As they approach expiry, they become less useful & decrease in value. Theta tells us how quickly this decline takes place. I.e. a -.5 theta means an option goes down $.50 every day.
Vega (V): Sensitivity of an option’s price to implied volatility. Vega explains how an option’s price changes as (implied) volatility of the underlying asset changes. All options go up in value when the market predicts increased future volatility.
Rho (ρ): Sensitivity of an option’s price to interest rates. Rho expresses the relationship between interest rates and an option’s price. If negative, that means an option will go down in value if interest rates go up. If it is positive, then an option’s value will go up with interest rates.

Security and Audits

Security is a top priority for Opyn. Gamma Protocol was audited by OpenZeppelin, formal verification was completed by Certora and the Opyn Bug Bounty has been running for over 4 weeks.

Further security audits will be running in the next few months to ensure there are up-to-date audits with the latest security best practices to identify new technologies that might contain current undiscovered vulnerabilities.

We will continue to share updates as we make improvements to the platform. Feedback is welcome and appreciated!

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