Writing/Exercising - Put Options

Similar to yesterday’s article today we will focus on an example of a Put Option.

Yesterday’s Article - Please read this first to understand the assumptions here.

Bob is a YFI speculator and thinks the Price of YFI will remain stagnant the next couple of weeks (24000 per YFI Today), he would like to utilize his DAI holdings to create additional income for his portfolio as well as potentially purchase YFI at a cheaper price if the price declines.

Alice is a YFI Hedger and is unsure on the direction of YFI’s price in the next couple of weeks, she would like to hedge her position to reduce downside risk.
Alice holds 1 YFI in her Wallet she is trying to hedge for.

Bob goes to Premia and decides to write 1000 YFI PUT contracts
(YFI Options are configured to 0.001 YFI per contract with strike price increments of 100 DAI)

Bob configures his PUT option Contract:

Type: Put

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

Select Token: YFI

Expiration: 2021–01–29

Quantity: 1000 Contracts

Strike Price: 22000 DAI

Once all validations are successful, Bob moves on to the next step to confirm the details.

Bob chooses to Mint his Put Option and immediately sell for 1000 DAI (1000 Contracts for 1 DAI Each)

Alice sees this a fairly priced option and decides to purchase all the contracts to protect her downside risk of holding 1 YFI (1000 Contracts in Lots of 0.001 YFI per)

Detailed Explanation (Behind the Curtain) — Covered Put

In this example to write 1000 (YFI:DAI — 2021JAN29–22000 — PUT) Contracts:

Bob will deposit 22000 DAI (1000 Contracts * 0.001 Contract Amount * Strike Price in DAI) Plus Fees to Mint the 1000 Contracts

This DAI will be locked up until Expiration, Exercise, or Cancellation and he will receive 1000 Contracts (ERC1155)

Bob then immediately sells for 0.2 DAI per contract or 1000 DAI in Total.

Alice purchases all contracts and a swap of 1000 Contracts vs ~1000 DAI (Minus Fees) is made.

Alice now holds the Contracts.

Outcome 1 — YFI Price appreciates to 26000 DAI

Fast Forward a few weeks in the future (2021–01–29 Expiration Day) and the purchaser of the options, Alice, sees YFI is now trading at 26000 DAI per YFI.

It does not make economic sense for Alice to exercise the contracts as if she wanted to sell her 1 YFI today, she could get a better price in the market.

Alice allows the contracts to expire worthless.

After expiration Bob is allowed to withdraw his original 22000 DAI and keeps the 1000 DAI premium he made.

Bob is happy he was able to utilize his DAI for additional income, and Alice is happy the price of YFI did not decline.

Outcome 2 — YFI Price depreciates to 20000 DAI

Fast Forward a few weeks in the future (2021–01–20) and the purchaser of the options, Alice, sees YFI is now trading at 20000 DAI per YFI.

This is within her risk parameters to exercise as the options hold intrinsic value (22000 DAI Strike - 1000 DAI Premium = 21000 DAI)

Alice navigates to the correct page on the Premia Portal and pays 0.001 YFI for each contract via 1 batch transaction 0.001*1000=1 YFI.

Alice has effectively sold her YFI at 21000 (Strike Minus Premium) as the price is locked in via the Put contract she holds.

Alice exercises the contracts, transfers 1 YFI, and receives 22000 DAI. Even if Alice did not hold YFI she could have purchased a contract on the market and immediately exercised it for profit.

Once the option has been assigned and transferred, Bob is able to withdraw his 1 YFI. Bob does not need to wait till Expiration in this example.

Alice is happy as she has managed her downside risk. Although not optimal for Bob, Bob is content as he was able to purchase 1 YFI cheaper (21000 vs 24000) than when he wrote the option.

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)

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