Writing/Exercising - Call Options

Overview - Writing & Exercising a Covered Call

Today we would like to share with you how the Covered Call Options Write & Exercise functionality will work upon launch!

Bob is a Chainlink (LINK) holder and thinks prices will remain constant the next couple of weeks (12 DAI per LINK Today), thus he would like to sell covered call options to provide an additional income stream to his portfolio.

Alice is a Chainlink Speculator and thinks prices will increase rapidly in the next couple of weeks and would like to purchase Call Options to exercise in the future.

Bob goes to Premia and decides to write 60 options contracts. (LINK Options are configured at 1 LINK Token per Contract with Strike Prices in increments of 0.1 DAI)

Bob Navigates to the correct screen and configures his Option Contract.

Type: Call

Denomination: DAI (3 Option Denominations are allowed, however to consolidate Liquidity at Launch choices will be confined to DAI)

Select Token: LINK

Expiration: 2021–01–29

Quantity: 60 Contracts

Strike Price: 13.60 DAI

The Interface will tell you when all validations have succeeded for example that you possess the correct token amounts to write the contract and the strike price is in the correct increment amount.

Note: Expirations are Every Friday at 23:59:59 UTC, and partial contracts cannot be minted as they are not divisible. However we have set the contract lot amount at a low tolerance so that all account sizes can participate.

Bob will be asked to confirm the details of the Option before minting.

Bob can either Mint and Sell on the Premia Marketplace, he can choose to Mint only & sell on another platform, or choose to sell at a later time!

For this example let’s assume he sells the Call Options on the Marketplace for 1 DAI each, and Alice Purchases all 60 Options Paying Bob 60 DAI Premium today for the Contracts.

Detailed Explanation (Behind the Curtain) — Covered Call

In order to write 60 (LINK:DAI - 2021JAN29 - 13.60 - CALL) Contracts:

Bob will deposit 60 LINK into the contracts vault + Pay Fees in LINK, and the smart contract will mint 60 Contracts (ERC1155) and transfer those to his wallet account.

Bob’s collateral of 60 LINK is now locked with the smart contract until 1 of 3 actions takes place either Expiration, Exercise, or he chooses to Cancel.

Bob can now sell those contracts for any premium amount he wants on the Premia Marketplace (He is incentivized to price them correctly however as he may not find a willing buyer)

**More on Buy/Sell Transactions later this week**

Note: If Bob does not find any buyer, or gets cold feet and would like to withdraw his collateral Bob can choose to Cancel his options. Since Bob is the original writer the contract knows this and he can choose to Burn his Options Contracts to redeem his collateral in full. (Or if sold he may buy back in the market to do this)

Assuming Bob did sell his options to Alice however two outcomes can occur (As Alice is now the ERC1155 Token Holder of all 60 Contracts)

Outcome 1 — LINK price appreciates to 17 DAI per LINK

Fast Forward a few weeks in the future (2021–01–20) and the purchaser of the options, Alice, sees LINK is now trading at 17 DAI per LINK.

This is within her risk parameters to exercise as the options hold intrinsic value (13.60 DAI Strike + 1 DAI Premium = 14.60 DAI)

Alice navigates to the correct page on the Premia Portal and pays 13.60 DAI for each contract via 1 batch transaction 13.60*60=816 DAI.

Alice transfers 816 DAI and Receives ~60 LINK minus Fees into her wallet. As the current price of LINK is greater than 15 DAI she can choose to hold or sell for immediate profit (~1020 Market Price - 816 Strike Paid - 60 Premium Paid = 144 DAI Profit)

Alice has returned 2.4x on her initial risk investment (144/60)!

Once the option has been exercised Bob can now remove the 816 DAI owed to him. In this example Bob has not lost any money, but capped his potential gains by selling the option (816 Strike Received + 60 Premium Received = 876 vs 1020 Market Price)

Outcome 2 — LINK price remains stagnant at 12 DAI per LINK

Fast Forward a few weeks in the future and the purchaser of the options, Alice, sees LINK is still trading at 12 DAI per LINK.

This does not fit within her risk parameters to exercise and thus she allows the options to expire worthless and has forfeited her 60 LINK long call position she purchased for 60 DAI.

Once the Expiration Date has passed Bob can withdraw his original capital of 60 LINK and has successfully collected 60 DAI as additional income like he originally planned!

Note: Premia Protocol Fees are taken during the following actions Write/Buy/Sell/Exercise and are dependent on if the wallet is part of the Referral Fee Reduction program as well as the amount of Premia Locked and thus their Tier Level. (More on Tier Levels & Fees in the Future)

Thanks — Check back tomorrow when we will go through a detailed Put Example!

All details outlined herein are subject to change prior to launch of the protocol.