Options Trading

Buy and sell call and put options on major token pairs. Options provide leveraged exposure, hedging capabilities, and defined risk through transparent on-chain pricing.

At a Glance

• Trade call and put options on major token pairs (ETH, BTC)
• Direct pool-based purchasing with instant premium calculation
• Options as ERC721 NFTs - transferable and composable
• Exercise window: 1 hour before expiry
• Auto-exercise for in-the-money options at expiration
• On-chain settlement in USDC
• Defined maximum loss for option buyers

Option Basics

What Are Options?

Options give the right, but not obligation, to profit from price movements:

Call Option: Profit when price rises above strike price.

Put Option: Profit when price falls below strike price.

Key Terms

Strike Price: Price at which profit is calculated.

Expiration: Date when option expires.

Premium: Price paid upfront to buy the option.

Underlying: The token the option is based on (e.g., ETH).

Exercise Window: 1-hour period before expiry when option can be exercised.

In-the-Money (ITM): Option has profit potential.

• Call: Underlying price > strike
• Put: Underlying price < strike

Out-of-the-Money (OTM): Option has no intrinsic value.

• Call: Underlying price < strike
• Put: Underlying price > strike

At-the-Money (ATM): Underlying price equals strike.

Buying Options

Why Buy Options?

Leverage: Control large position with small capital.

Own 10 ETH: Costs $20,000
Buy 10 call options: Costs $500-800
Exposure: Same upside, 96% less capital

Defined Risk: Maximum loss = premium paid.

Hedging: Protect existing positions.

Buying Process

1. Navigate to Hedge → Options
2. Select token pair (e.g., ETH/USDC)
3. Choose option type:
   • Call (profit from price increase)
   • Put (profit from price decrease)
4. Enter amount (e.g., 1 ETH)
5. Select duration:
   • Minimum: 1 day
   • Maximum: 30 days
   • Common: 7 days, 14 days, 30 days
6. Review quote:
   • Premium cost (USDC)
   • Max profit potential
   • Max loss (premium paid)
   • Break-even price
7. Approve USDC spending
8. Confirm purchase
9. Receive option as ERC721 NFT

Premium deducted immediately. Option NFT appears in wallet and portfolio.

Call Option Example

Buy Call:
- Underlying: ETH at $2,000
- Strike: $2,200
- Expiration: 30 days
- Premium: $80 per ETH
- Size: 5 ETH worth

Cost: $80 × 5 = $400

Scenarios at Expiration:

ETH at $1,800:
- Option expires worthless
- Loss: $400 (premium paid)

ETH at $2,200:
- At strike, no profit
- Loss: $400 (premium paid)

ETH at $2,500:
- Profit: ($2,500 - $2,200) × 5 = $1,500
- Net: $1,500 - $400 premium = $1,100
- ROI: 275%

Break-even: $2,280 ($2,200 strike + $80 premium)

Put Option Example

Buy Put:
- Underlying: ETH at $2,000
- Strike: $1,800
- Expiration: 30 days
- Premium: $50 per ETH
- Size: 10 ETH worth

Cost: $50 × 10 = $500

Scenarios at Expiration:

ETH at $2,500:
- Option expires worthless
- Loss: $500 (premium paid)

ETH at $1,800:
- At strike, no profit
- Loss: $500 (premium paid)

ETH at $1,500:
- Profit: ($1,800 - $1,500) × 10 = $3,000
- Net: $3,000 - $500 premium = $2,500
- ROI: 500%

Break-even: $1,750 ($1,800 strike - $50 premium)

NFT-Based Positions

Options are ERC721 tokens with unique benefits:

Transferability

Option as NFT:
- Transfer to another wallet
- Sell on NFT marketplaces
- Gift or delegate to others
- Use as collateral (where supported)

No lockup: Options can be traded anytime before expiry.

Position Tracking

Each NFT contains option data:

Option NFT Metadata:
- Strategy type (Call, Put, Straddle, etc.)
- Underlying asset (ETH, BTC)
- Strike price
- Expiration timestamp
- Amount/size
- Purchase premium

Query on-chain via PositionsManager contract.

Composability

NFTs enable DeFi composability:

Possible Use Cases:
- Collateralize in lending protocols
- Bundle multiple options in vaults
- Create option indices
- Automated trading strategies

Exercise Mechanics

Exercise Window

Options can only be exercised during the 1-hour window before expiry:

Option Timeline:
Created → Active Period → Exercise Window (1h) → Expiry
                           └─ Can exercise here

Why the window?

• Prevents gaming the system
• Ensures fair profit distribution
• Aligns with epoch mechanics

Manual Exercise

Exercise during the window:

1. Navigate to active position
2. Check current profit (if ITM)
3. Click "Exercise"
4. System calculates profit based on current price
5. Confirm transaction
6. Receive USDC profit
7. NFT burns

When to exercise early:

• Option is deep in-the-money
• Want to lock in profits before expiry
• Need liquidity immediately

Auto-Exercise

System automatically exercises ITM options at expiration:

At Expiration:
1. System checks if option is ITM
2. If profit > 0:
   - Calculates profit automatically
   - Transfers USDC to owner
   - Burns NFT
3. If profit = 0:
   - Option expires worthless
   - NFT becomes inactive

No action required: Profitable options automatically settled.

Settlement Process

Exercise Flow:
1. Exercise submitted (manual or auto)
2. Strategy contract queries Chainlink price
3. Profit calculated: max(0, currentPrice - strike) for calls
4. Treasury unlocks liquidity
5. If Treasury insufficient: CoverPool provides backup
6. USDC transferred to option holder
7. Position marked as exercised
8. NFT burns

Total time: < 10ms on MegaETH

Selling Options

Advanced strategy for earning premium income.

Why Sell Options?

Premium Income: Collect premium upfront.

Statistical Edge: Most options expire worthless. Sellers profit from time decay.

Yield on Holdings: Generate income on assets you already own.

Risks

Assignment Risk: Obligation to fulfill if exercised against you.

Collateral Requirement: Must lock assets as collateral.

Unlimited Risk: Selling naked calls can have unlimited losses (not recommended).

Selling Process

1. Navigate to Sell Options
2. Select strategy and underlying
3. Enter parameters (strike, expiration, amount)
4. Review collateral requirement:
   • Covered Call: Must own underlying tokens
   • Cash-Secured Put: Must have USDC equal to strike × amount
5. Deposit collateral
6. Review premium received
7. Confirm sale
8. Receive premium immediately
9. Collateral locked until expiry or close

Premium credited immediately. Position shows in portfolio as "sold option."

Covered Call Example

Sell Covered Call:
- Hold: 10 ETH at $2,000
- Sell: 10 ETH calls at $2,200 (30 days)
- Premium: $80 per ETH × 10 = $800

Collateral: 10 ETH (already owned)

Scenarios at Expiration:

ETH at $1,800:
- Option expires worthless
- Keep: 10 ETH + $800 premium
- Unrealized loss on ETH: $2,000
- Net: Loss $1,200 (premium helped cushion)

ETH at $2,100:
- Option expires worthless
- Keep: 10 ETH + $800 premium
- Unrealized gain on ETH: $1,000
- Net: Gain $1,800

ETH at $2,500:
- Buyer exercises option
- Calculate profit: ($2,500 - $2,200) × 10 = $3,000
- You pay: $3,000 from ETH value
- Keep: Original ETH ($20,000) + premium ($800)
- vs Market value: $25,000
- Opportunity cost: $2,200 (missed upside)

Outcome: Generate income, cap upside

Cash-Secured Put Example

Sell Cash-Secured Put:
- Underlying: ETH at $2,000
- Sell: 10 ETH puts at $1,800 (30 days)
- Premium: $50 per ETH × 10 = $500

Collateral: $18,000 USDC

Scenarios at Expiration:

ETH at $2,500:
- Option expires worthless
- Keep: $18,000 USDC + $500 premium
- Annualized: ($500 / $18,000) × 12 = 33% APY

ETH at $1,900:
- Option expires worthless
- Keep: $18,000 + $500
- Could have bought ETH cheaper but earned premium

ETH at $1,500:
- Buyer exercises option
- Profit to buyer: ($1,800 - $1,500) × 10 = $3,000
- You pay: $3,000 from collateral
- Effective cost: $18,000 - $500 premium = $17,500
- If you wanted ETH: Got better entry than $1,800

Outcome: Get paid to set limit buy order

Managing Positions

Position Overview

View all active options in portfolio:

Position Dashboard:
- Option ID (NFT token ID)
- Strategy type
- Underlying asset
- Strike price
- Expiration date
- Current profit/loss
- Time remaining
- Exercise availability

Closing Before Expiration

Bought Option:

• Transfer/sell NFT on secondary market
• Exercise early if in exercise window
• Let expire if OTM

Sold Option:

• Buy back the option to close obligation
• Reduces exposure
• Frees collateral early

Position Monitoring

Track key metrics:

Real-Time Metrics:
- Current P&L
- Break-even price
- Days to expiration
- Greeks (Delta, Gamma, Theta, Vega)
- Probability of profit

MegaETH's continuous execution enables real-time updates.

Option Strategies

Single-Leg Strategies

Long Call: Bullish speculation or hedging short position.

Long Put: Bearish speculation or protecting holdings.

Covered Call: Income generation on holdings.

Cash-Secured Put: Income while waiting to buy.

Multi-Leg Strategies

Straddle (Call + Put, same strike):

Buy both call and put at $2,000

Profit if:
- Large move either direction
- Volatility increases

Loss if:
- Price stays near strike
- Time decay exceeds moves

Strangle (Call + Put, different strikes):

Buy $2,200 call + $1,800 put

Lower cost than straddle
Requires larger move to profit
Wider break-even range

Spreads (Multiple options to limit risk):

• Call Spreads (bull or bear)
• Put Spreads (bull or bear)
• Vertical spreads reduce premium cost

More strategies →

Greeks and Risk Metrics

Delta

Price sensitivity:

Delta 0.5 means:
- If ETH moves $1 up, option value increases $0.50
- If ETH moves $1 down, option value decreases $0.50

Call options: Delta 0 to 1
Put options: Delta -1 to 0

Use for position sizing:

Want 10 ETH delta exposure:
Option has delta 0.5
Need: 20 contracts (20 × 0.5 = 10 delta)

Gamma

Delta change rate:

Gamma 0.02 means:
- If ETH moves $1, delta increases by 0.02

High Gamma: Near ATM, short expiry
Low Gamma: Deep ITM/OTM, long expiry

Theta

Time decay:

Theta -2 means:
- Option loses $2 value per day
- All else equal

Option buyers: Negative theta (time works against)
Option sellers: Positive theta (time works for)

Vega

Volatility sensitivity:

Vega 5 means:
- If implied volatility rises 1%, option gains $5
- If implied volatility falls 1%, option loses $5

Long options: Positive vega (want volatility)
Short options: Negative vega (want calm markets)

Interface displays all Greeks in real-time for every position.

Premium Calculation

How Premiums Are Determined

Options priced on-chain using Black-Scholes model:

Premium Inputs:
1. Current price (from Chainlink oracle)
2. Strike price (user selected)
3. Time to expiration (user selected)
4. Implied volatility (strategy parameter)
5. Risk-free rate (minimal in DeFi)

Calculation:
Strategy contract computes Black-Scholes formula
Returns premium in USDC (6 decimals)

Real-Time Pricing

Pricing Flow:
1. User enters parameters
2. Frontend calls strategy.calculateNegativepnlAndPositivepnl()
3. Strategy queries Chainlink for current price
4. Black-Scholes calculation executes on-chain
5. Premium displayed to user
6. Updates dynamically as parameters change

Latency: < 50ms

Transparent, deterministic pricing with no hidden fees.

Transaction Fees

Fee Structure

Protocol Fee: 0.03% of notional value

Gas Cost: ~ $0.005 on MegaETH (negligible)

Total Cost: Premium + Protocol Fee + Gas

Example:
Option: 1 ETH at $2,000
Premium: $80
Protocol Fee: $2,000 × 0.0003 = $0.60
Gas: $0.005
Total: $80.605

Ultra-low fees compared to traditional options exchanges.

FAQ

What's the minimum trade size?
Varies by strategy. Typically 0.1 ETH or equivalent (implementation dependent).

Can I exercise options before the exercise window?
No. Options can only be exercised during the 1-hour window before expiry or via auto-exercise at expiration.

What if I don't exercise during the window?
System auto-exercises ITM options at expiration. You receive profit automatically.

What if option expires OTM?
Option expires worthless. You lose the premium paid. NFT becomes inactive.

Can I sell my option before expiry?
Yes. Options are ERC721 NFTs and can be transferred or sold on secondary markets.

Are there fees to trade options?
Small protocol fee (0.03% of notional) + minimal gas (~$0.005 on MegaETH).

Can I see historical option prices?
Yes. On-chain data enables tracking premium values, Greeks, and P&L over time.

What happens at expiration if I do nothing?
ITM options auto-exercise and pay profit. OTM options expire worthless.

How is profit calculated?
Based on Chainlink oracle price at exercise time vs strike price, settled in USDC.

Next Steps

Deepen options knowledge:

• Hedging Strategies - Protect positions
• Risk Management - Control risk
• Pricing Models - Understand valuations

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Trade smart. Trade options.