Guide: Writing Put Options with Pods
Sell options by locking collateral and earn a premium
Pods is the easiest way to hedge crypto assets on Ethereum.
But first, what is an option, and what does it mean to sell one?
"Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell — depending on the type of contract they hold — the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.
Call options allow the holder to buy the asset at a stated price within a specific timeframe.
Put options allow the holder to sell the asset at a stated price within a specific timeframe."
Investopedia, https://www.investopedia.com/terms/h/hedge.asp
Within the DeFi space, ERC20 tokens represent the options contract rules. This means that users worldwide can create and trade options tokens without an intermediary, accessing global liquidity for each asset.
To sell an option token, the user must hold option tokens in their wallet. There are two ways to get an option token in one’s wallet:
- By creating a brand new option token or
- By buying options tokens in the market.
However, the use case for each is different. A user who wants to sell an option to earn the premium or be exposed to the underlying asset should create a new token and then sell it in the AMM. On the other hand, a user that already has options tokens in their wallet can choose to “resell” these tokens and get back some or more of the premium initially paid for that position.
This is true for both calls and puts of any ERC20 in Ethereum.
The Pods protocol allows users to sell an option (often referrer to “open a sold position in options”) in two different ways:
- By locking collateral, minting (or creating) a new option token and selling it to the AMM or
- By “reselling” the options this user already had a position in.
This post will explore the first use case to create a new option token and sell it to the AMM.
Earning premium and (maybe) buying the asset at a discount
When selling a put option, the seller agrees to buy the asset at an agreed-upon price. It can also be understood as an alternative investment since the option seller will allocate funds as collateral and get exposure to buying the underlying asset (in the exercise case). In return for future exposure to the underlying asset, the seller receives a premium upfront.
The motivations behind selling an option are many since they can be a crucial part of structured products, but we can highlight two of the most simple use cases:
- Earning additional income with the upfront premiums for selling an option and hoping that it will expire out-of-the-money.
- When the user is bullish on a token and would buy the asset at the strike price, they can sell put options and “buy the asset at a discount” (account for the premium earned and the price paid for the asset) considering that they had the intention of buying the asset anyway.
Smart Collateral
When creating a new option token, the user has to lock funds as collateral. The Pods protocol allows users to lock interest-bearing tokens as collateral and generate additional yield during the option lifetime to increase capital efficiency.
Remember: Selling a put option translates into the exposure of buying the underlying asset at the strike price by the maturity date and receiving a premium upfront for this risk. Only sell an option if you are willing to be exposed to the underlying asset.
Never allocate funds you are not willing to lose in a highly experimental DeFi protocol. Risks go far beyond the market risk. Learn more about risks here.
User flow of selling an option
Find below a diagram that explains what happens under the hood when a user mints (or creates — by locking collateral in a new option token) and sells the option in the Options AMM.
If you want to find further details about this operation and its solidity implementation, please feel free to check our documentation.
Now let’s see how it works in practice!
Selling a put option in the app
Click on the “Sell Tab,” and you will be able to see all the option series available at the moment.
After choosing which options you are willing to sell, click on the arrow so that you get redirected to the selling page.
Remember: selling a put option means maybe buying the underlying asset at the strike price.
Remember that you should only sell a put option if you intend to have exposure to the strike price’s underlying asset.
To sell an option, in Step 1, you should input how much collateral asset you want to lock or how much underlying you are willing to buy for this equivalent amount of collateral asset. Step 2 will calculate and show how much premium you will receive upfront for selling such protection. You will receive the premium is in the collateral asset.
Step 3 summarizes the operation.
Once you confirm the data and the operation, it’s time to “Allow” and confirm the option’s sale.
Here is a quick video demoing this operation to help guide you in your exploration for yield and exposure:
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About Pods
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start testing the app on app.pods.finance
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