Options Trading on DeVol
Learn more about how DeVol options are traded and settled, and how they differ from traditional options.
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Learn more about how DeVol options are traded and settled, and how they differ from traditional options.
Last updated
Options allow a trader to gain exposure to price movements of an asset (the underlier) without having to buy or sell this asset directly. On DeVol, users trade synthetic options (via the Standard Risk Block system) that are fully collateralized, crypto-settled. European options with crypto underliers.
Synthetic options. The DeVol AMM is powered by a unique pricing methodology based on elementary units we call "Standard Risk Blocks” (SRBs), a new financial primitive. SRBs are used to synthetically price and settle any derivative payoff, including that of traditional options. You may notice that our strikes look a little unconventional. This is a feature, not a bug, of the SRB system and the benefits it provides.
Underlier (a.k.a. underlying): We currently support BTC and will be adding more underliers.
Settlement is in Base Currency ("Crypto-Settled"): Settlement is done in base currency (always a cryptocurrency, different from the underlier). We currently support USDC and will be adding more stablecoins.
No Underlier Delivery. When the option expires, buyers and sellers agree to settle the profit & loss of the option based on the observed price of the underlier relative to the base currency.
European Options: Unlike American-style options, which can be exercised at any time before expiration, European options can only be exercised at maturity when the option expires. DeVol offers European options with a range of maturities.
Options Expiration: On the expiration date, options expire at 8 am UTC. A new option (all strikes) is usually initialized one hour later at 9 am UTC, and supported by the same liquidity pool.
Expected Underlier Price Range: Unlike traditional options, options on DeVol do not cover all possible price fluctuations of the underlier. By design option payoffs do not cover extreme distributional tails, that is price fluctuations outside an expected price range for the underlier at expiration. This range contains most price fluctuations for the underlier during the trading period (i.e. at least 99.9% of the probability distribution).
Liquidity Pools. Each liquidity pool is assigned to a specific trading pair (underlier / base currency for settlement, e.g. BTC/USDC), duration (time to expiration) and a given initialization schedule (chain of options to be initialized with periodic frequency). All trades are peer-to-pool, meaning liquidity pools are the counterpart to all trades for a specific expiration, for all listed strikes -- buying or selling as required to make a market.
Full Collateralization: A pool supports only one actively traded expiration at a time. The pool always maintains sufficient collateral for settlement across the entire range of strikes in a given expiration. Subject to smart contracts and the underlying blockchain operating as intended, this eliminates counterparty risk, that is for instance the possibility that an option seller may default on its contractual obligations and that a buyer would not receive the profit & loss of the option.
Liquidity Providers (LPs). Anyone can be an LP and earn yield from tokens pledged as collateral to support options trading. Importantly, LPs deposit funds in a given pool without having to pick specific strikes or engage in active options trading. By providing non-fragmented liquidity across all strikes, LPs are protected from being “picked off” at certain strikes, that is experiencing losses that would become permanent as options expire.
Pricing: Our pricing methodology is unique and based on a new financial primitive, the Standard Risk Block (SRB). Via the SRB system, the DeVol AMM can replicate and price the payoff of any option strategy, including standard calls and puts and more complex strategies. The DeVol pricing AMM utilizes supply/demand data to continually reprice options. The estimated total cost of a trade includes a cost impact (or price impact), that is a deviation from estimated cost as a result of the size of the order relative to the total amount of trades in the expiration. This is done on the basis of:
The size of the trade relative to available liquidity in the pool and its sufficiency for payoff.
The size of the trade relative to the "inventory risk" of the pool given all pre-existing trades for the expiration.
Note that the actual executed price of an option can be different from the estimated price if other orders (from other traders) are placed in the system after the estimated price was displayed.
Settlement: Options on DeVol are synthetic options via the SRB system. As such, settlement works differently than options on traditional exchanges. As long as the underlying crypto ends up within its expected price range, settlement closely approximates a traditional option payoff (the difference between the price of the underlier at expiration and the option strike). SRB payoffs will vary slightly from traditional vanilla option payoffs, sometimes paying a little more, sometimes a little less.
To compare option payoffs between DeVol and a traditional exchange, please see examples in the following sections: Long Call, Long Put, Short Call, Short Put
In some rare occasions (this is expected to happen less than 0.1% of the time), the underlying crypto might end up outside of its expected range. In these cases, it is possible for the settlement amount to be significantly lower than with a traditional option. We view this as an acceptable trade-off for a decentralized, on-chain AMM with full collateralization, transparency, deep liquidity, and low fees.
