Nowadays, option trading has become very popular thanks to its ease of use and accessibility. To explain options, they are financial principles that give traders the option to buy or sell an asset at a predetermined price at a certain point in the future. With options, traders can secure themselves against price changes or speculate about the future price of an asset. As the decentralized finance industry continues to evolve, financial principles on blockchains such as options are the basis for more complex financial instruments.
If you are interested in options trading, you may want to learn more about SIREN, which aims to create a new market for active trading users who hold tokenized option contracts.
The on-chain options market '' SIREN Markets '', which will be on the market in December 2020 with the alpha release, will start on the main net on March 1.
SIREN Markets offers hassle-free on-chain options trading
SIREN is a decentralized protocol. It consists of in-chain options and is fully secured. In the SIREN protocol, all parties to the option contract are tokenized as ERC20 tokens. In this way, third parties are not needed to reconcile contracts through AMM design.
With Siren AMM v2, up to 6 SIREN option contracts can be traded and all of these option contracts share the same collateral and payment assets. This ensures that liquidity is transferred when a market ends for a seamless UX for liquidity providers.
The first step of the transaction is the liquidity providers depositing collateral in the SIREN AMM pool. This liquidity is coded as WBTC in the system. If you want to purchase an option from AMM, the collateral in the pool is used to issue a pair of tokens. These are bToken for buyToken and wToken for WriteToken. The bToken is sent to the buyer's account after the purchase request, whereby the trader can buy or sell the underlying asset at a predetermined strike price. Meanwhile, wToken stays in the pool. If the option is not applied, thanks to wTokens, the holder can withdraw the collateral or withdraw from the contract after making the usage payment.
Currently, only bTokens are traded thanks to SIREN AMM v2. wTokens do not change. It is said that it is possible to buy and sell wTokens in the future. The trader pays some premium to the margin pool per trade. In this way, liquidity providers become collateralized option writers. Traders' requests are also automatically committed through contracts. In addition to premium income, liquidity providers benefit from any slippage in AMM transactions and earn SI token awards from the SIREN Liquidity Provider Program (LPP). It is important to always be mindful of the risks associated with maintaining liquidity.
Providing option traders with the right tools for the job
SIREN's design aims to innovate with DeFi to tools that options traders have relied on in traditional finance and developed over the years, and allow traders to easily change entry and exit to provide the data they need to evaluate complex positions.
SIREN AMM v2 pricing changes (decreases) over time. There are two main factors influencing the price of transactions; spot price and slippage. Using the Block-Scholes model and Chainlink price prophecy, different parameters are taken into account and the spot price is determined. With this formula, Siren Markets become time sensitive without requiring arbitrage. If the transaction size, like other AMMs, is greater than the current asset in the pool, there will be a high amount of slippage. As a result, liquidity providers generate another source of income in addition to the income they earn from option premiums.
What are ITM, ATM and OTM?
If we need to briefly explain these terms that option traders already know; ITM (short for 'in the money') if it has a more affordable price compared to the current market price, OTM (abbreviation for '' out of-money '') if the strike price has not yet reached, and ATM (for '' at the money '' if the strike price is abbreviation)
With these terms, traders calculate how the option they plan to buy or sell will behave in the current market. For example, if you think the market price will increase significantly, you should consider purchasing an OTM because your risk of loss will decrease when the price drops.
These terms are just a few examples of the different options traders can use in their trading strategies. Let's take a look at other examples now.
Siren is designed for experienced options traders. That's why we'll give you a brief summary explanation on how to integrate Greeks into Siren Markets.
Delta is a ratio meter that compares the difference between the strike price of the option and the price of the underlying asset and estimates your underlying risk only theoretically.
In Gamma, the gamut of long options is always positive. Short options are negative. If there is too much gamma in our subject, you may need to monitor it closely. Gamma is highest for ATM strike and tends towards ITM and OTM strikes.
Theta, also called decrease over time, measures the decrease in value of an option as time passes. It is inversely proportional to the Theta gamma. Theta tends to be large and negative when gamma is large and positive
Vega shows how much the value of the option changes with the change in the implied volatility of the option.
Sophisticated users are rewarded with SI, the local token of SIREN, with the SIREN Market Project, which was created to provide a seamless on-chain experience with the financial tools and features that traders know from traditional finance, which has been developing for centuries. The purpose of this is to reward the first users to whom the platform has delivered its future. Liquidity providers, traders and market makers will receive SI awards for their participation on the platform, by design, the most experienced and knowledgeable users will be given the most impact on the platform to help respond to future market demands. In addition, the SI community with these awards will be able to create new options markets, determine the fees required to write, close and redeem an option.
The first SIREN Liquidity Provider Program (LPP) started in December 2020 and has been extended until May 2021.
Thanks to DeFi, even many people who do not actively operate in traditional finance have started to enter the financial world. Because DeFi enables everyone to access the same tools and data as experts. With the growing popularity of options trading in traditional finance, it is thought that on-chain options could play a bigger role as DeFi has become more widely adopted. If you want a more sophisticated options trading experience, we recommend that you take a look at the SIREN platform, which is early in its development, as soon as possible.