[The explanation assumes you are the seller of the option]
Selling an option lets you enjoy a non-refundable instant premium (Premium Receivable). In return for the premium, you’re obliged to sell the underlying asset to the buyer if the option settles In-The-Money. When you sell an option, you receive the Premium Receivable. In return for the premium, you’re obliged to sell the underlying asset (pay the Cash Settlement in the case of Sparrow) to the buyer if the option settles In-The-Money.
Sparrow offers Call and Put options on BTC and ETH. The Premium Receivable is non-refundable and denominated in Sparrow Dollars (SP$), the settlement token of Sparrow. To sell an option, sellers will have to pledge the underlying assets (for sell Calls) or SP$ (for sell Puts) in return for the Premium Receivable from the buyer.
Why are sell Calls pledged in the underlying assets?
Sparrow has specially designed this pledging system to account for extreme market situations such as when the price rallies too much. This will help to protect buyer by preventing counterparty risk, where there is a possibility that seller might default on his or her contractual obligation.
Example: If you make a BTC/USD sell Call option trade and the price of BTC rallies — With BTC as the pledged collateral instead of SP$, counterparty risk will be negated as the BTC previously pledged by the seller will be sufficient to settle with the buyer at the agreed upon rate of equivalence.
Why are sell Puts pledged in SP$?
Sparrow has specially designed this pledging system to account for extreme market situations such as drastic price dips. This will help to protect buyer by preventing counterparty risk, where there is a possibility that seller might default on his or her contractual obligation.
Example: If you place a BTC/USD sell Put option trade and the price of BTC drops drastically and becomes worthless — With SP$ as the pledged collateral instead of BTC, counterparty risk will be negated as the SP$ previously pledged by the seller will still be able to settle with the buyer at the agreed upon rate of equivalence.
Definitions
Selling a Call option (Sell Call)
Represents an obligation to sell the underlying asset at the Strike Price on the Settlement Date. The seller receives a premium for taking on the risk associated with the obligation
Selling a Put option (Sell Put)
Represents an obligation to sell the underlying asset at the Strike Price on the Settlement Date. The seller receives a premium for taking on the risk associated with the obligation
Learn more about
- Boosting your trades with crypto options
- Buying a Crypto Option Contract
- Buying Crypto Call Option (Buy Call)
- Buying Crypto Put Option (Buy Put) - Selling a Crypto Option Contract
- Selling Crypto Call Option (Sell Call)
- Selling Crypto Put Option (Sell Put)
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