Options trading is a relatively unpopular area in the DeFi market. Much of the reason is because not many people really understand what options are and how options trading works.

To help users participate in the options market and at the same time gain a clear understanding, Dopex has developed a series of articles “Dopex Essentials Series” to educate users through the basic knowledge that everyone needs to know before trading options on Dopex.

Here is the complete list of parts of this Series:

• Dopex Essentials – Basic Options Theory (Part 1)
• Dopex Essentials – Basic Options Theory (Part 2)
• Dopex Essentials – Basic Options Theory (Part 3)
• Dopex Essentials – Basic Options Theory (Part 4)
• Dopex Essentials – Basic Options Theory (Part 5)
• Dopex Essentials – Basic Options Theory (Part 6)
• Dopex Essentials – Basic Options Theory (Part 7)
• Dopex Essentials – Basic Options Theory (Part 8)
• Dopex Essentials – Basic Options Theory (Part 9)

Before going into the content of the article, everyone can refer to the following articles to better understand Option Trading and Dopex!

• Huge Growth Potential of Options in DeFi
• Exchange Between Weakhand & Dopex – Leading Options Platform on DeFi (Vietnamese)
• What is Dopex (DPX)? Overview of Dopex Cryptocurrency
• Series 9: Real Builder | Dopex – Growing Amid Difficult Insects

What Are Options?

There are two types of options viz Call Options or call option, and Put Options is a sell option.

A call option is the right to buy the underlying asset at the strike price on the contract expiration date. When executing a call option, it means that the option buyer is betting that the price of the underlying asset will increase.

A put option is the right to sell an asset at the exercise price on the contract expiration date. When executing a put option, it means that the option seller is predicting that the price of the underlying asset will decrease.

The parameters of an options contract include:

• Underlying assets: An asset whose price is being predicted in a contract, such as Bitcoin.
• Contract expiration date: The date on which the option is exercised, after this date, the contract is no longer valid.
• Exercise price: Or there is a place called the exercise price, which is the price at which the buyer has the right to buy or sell the underlying asset when the contract expires.
• Type of option: Buy option or sell option.
• Premium fee: Also known alternatively as the price or value of the option. The price that an option buyer pays to the option seller for the right to buy or sell an asset at the exercise price on the contract’s expiration date.

Options on Dopex are European-style options, which means options can only be exercised when the contract expires, unlike American-style options where options can be exercised before the contract expires.

Motivation for you to buy an option:

• You want to limit risk while still having great profit potential.
• You want to hold a position without having to think about the risk of having to cut losses or liquidate the position.
• You predict that the price of the asset will be highly volatile, or that “expected volatility” is likely to increase.

Motivation for you to sell an option

• You want to make a profit from the premium fee.
• By the contract expiration date, if there is no price movement of the underlying asset, you will make a profit.
• You predict that the asset’s price will fluctuate slightly, or that “expected volatility” (Implied Volatility) will decrease. Implied volatility is an important concept and will be explained later.
• You can profit when the market overestimates the future price movements of the underlying asset.

Options Trading

Here’s how options trading works:

The option seller “writes” (that is, creates) call and put option contracts. Every option contract has an expiration date and strike price.

The option seller will then list the contracts on an options exchange. In many cases, option buyers can also place orders on the exchange and option sellers can match those orders.

The cost to write an option is often called the “premium”. The premium fee will depend on the contract execution time, the level of expected volatility in the market, and the interest rate of the central bank (or state bank, or federal reserve in the case of the US). and the price of the underlying asset when writing the contract.

Some Terms to Note:

In the money (ITM)

• In a call option contract, this term is used to refer to the phenomenon where the exercise price is lower than the market price of the underlying asset.
• In a put option contract, this term is used to refer to the phenomenon where the strike price is higher than the market price of the underlying asset.

At the money (ATM)

• For both call and put options, this term is used to refer to the phenomenon where the market price is equal to the current price of the underlying asset.

Out of the money (OTM)

• In a call option contract, this term is used to refer to the phenomenon where the strike price is higher than the market price of the underlying asset.
• In a put option contract, this term is used to refer to the phenomenon of the exercise price being lower than the market price of the underlying asset.

Traders who want to exercise a call option while the strike price is below the market value of the underlying asset will have to pay significantly higher fees to open the contract. This is because the contract was then ITM (It can be understood as if you enter a position and have positive PnL immediately). Of course, it is not certain that the market price of the underlying asset will continue to rise above the strike price until the contract’s expiration date.

Consider the following example:

The price of one Bitcoin at the beginning of June was $54,000, but Mario believes that by the end of July the price will be much higher. He decided to buy 10 options with a strike price of $54,000 and a Premium fee of 0.003 Bitcoin per contract, expiring on July 30.

At the time Mario bought the call option, 0.003 BTC was at $54,000 = $162. The value of the 10 options is $1,620.

With each contract, Mario can buy 0.1 BTC at a price of $54,000. With 10 contracts, Mario can buy a total of 1 BTC at a price of $54,000 when the contract expires on July 30.

Scenario X: When the contract expires, the price of Bitcoin is $60,000. Mario exercises his call option and makes a profit of $6,000 (60,000–54,000=6,000). Minus the Premium fee, Mario net profit is $4,380 (6,000–1,620=4,380).

Scenario Y: When the contract expires, the price of Bitcoin is $40,000. Mario decides not to exercise the call option because the position is “OTM”. In total, Mario lost 1,620 USD, the loss came from Premium fees.

Crypto Options and Traditional Options

The biggest difference between options trading in the traditional market and options in the crypto market is that the crypto market operates 24/7. Crypto markets also have higher volatility, meaning prices tend to increase or decrease more sharply than traditional markets.

High volatility means higher profit potential for options traders, because high volatility means the difference between the strike price and the market price of the underlying asset will likely be larger. than.

Introducing Dopex

Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers, and maximize profits for passive option buyers.

This article is done based on the combination of Dopex & Weakhand