🛠️How does Oddz work?
Buy call and put options for profits or to hedge your positions. Contribute to the liquidity pool and start earning yield.
Last updated
Buy call and put options for profits or to hedge your positions. Contribute to the liquidity pool and start earning yield.
Last updated
The user will be able to buy options by entering the following information:
Type (Call or PUT)
Asset (WBTC, ETH etc)
Strike Price
Expiry in days
Once the user selects the following information, they will be able to see the premium that they are required to pay is computed after factoring in the current asset price and the Implied Volatility. Both these factors are pulled in via external on-chain oracles.
The user is also charged a protocol transaction fee which is a % of the premium value. Once the user pays the premium + transaction fees in USD-backed stablecoins, the transaction is processed on-chain and they become the owner of the options.
Users can also pay the protocol transaction fees in the native Oddz token to get a discount.
Users will get a chance to buy a fraction of the option as well, this can be accomplished by selecting the quantity of the option for currencies including WBTC and ETH, thus entering values between 0 and 1. This will automatically recalibrate the premium and settlement fees.
Once an options smart contract is issued, there is a need to lock the relevant assets into the contract to ensure robust settlements on exercise of the options.
For call options, using market volatility indicators and other technical instruments the protocol computes the over collateralized information. Based on this information, the required amount of USD based stablecoin is locked in the Liquidity Pool. The amount locked can be no more than the "strike fees - settlement fee" since at the time of exercise, only the profits are transferred to the user.
For example: A user is purchasing a call option on ETH. Based on the recent volatility of Ethereum, an over collateralized percentage is set. Let’s say it is set at 50%. Now,
cp (Current price) = 1000 USD
sp (Strike price) = 1200 USD
occ (Over collateralized calculation) = 1500 USD (Over collateral calculation is 50%, which constitutes to 1500 USD based on “cp”)
profit is “occ” - “sp” = 300 USD
At most, profit buyer can have is: MIN(profit [300], sp [1200]) - Settlement Fee (sf)
Thus the amount to be locked via the liquidity pool is 300 USD
sf (Settlement Fee) is % of the profit at the time of exercise
For Put Options
Similarly for put options, the over collateralized ratio is calculated based on which the maximum profits are locked via the liquidity pool.
For example: A user is purchasing a put option on ETH. Based on the recent volatility of Ethereum, an over collateralized percentage is set. Let’s say it is set at 50%. Now,
cp (Current price) = 1000 USD
sp (Strike price) = 700 USD
occ (Over collateralized calculation) = 500 USD (Over collateral calculation is 50%, which constitutes to 500 USD based on “cp”)
profit is “sp” - “occ” = 200 USD
At most, profit buyer can have is: profit [200] - Settlement Fee (sf)
Thus the amount to be locked via the liquidity pool is 200 USD
sf (Settlement Fee) is % of the profit at the time of exercise.
The amount to be locked is provided by the Liquidity Pool in the form of USD backed stablecoin. At expiry, these profits can be transferred either in USD based stablecoin or the underlying asset based on their wish.
Oddz protocol removes the need to have option writers with liquidity providers taking their place. The liquidity pool consists of USD Pegged stablecoin provided by liquidity providers.
As discussed earlier, the pool is used for locking assets for exercise of call and put options. The liquidity providers are rewarded via the premiums collected along with staking rewards from the portion of settlement fee for staking the oUSD tokens they get when they provide the liquidity.
The reward for the liquidity provider is computed based on net gains which is basically the difference of the profit (via premiums) and loss (via exercised options).
When an option is burned, which is possible in two scenarios;
Option is exercised
Out of Money (OTM) at expiry
At the time of any option being either bought or exercised, the share in the liquidity pool is recorded which is the "liquidity provided by the user / total liquidity in the ecosystem" (for the next sections, let’s call this ratio X).
At the time an option is purchased, the premium is earmarked for each liquidity provider based on amount of premium paid * X. This acts as their profits.
When (and if) the particular option is exercised, there is a loss to the liquidity pool and this loss is also earmarked to each liquidity provider (which had some profits from the time of purchase). The loss earmarked for each liquidity provider is based on the amount of USD outflow * X. This acts as their loss.
Thus the net gains for a provider, at any time are the "profits - losses".
Depending on the utilisation of LP pool and % buffer, LPs can take out their liquidity but if the time spent in the pool is less than the threshold of 14 days, premium fee collected will be distributed to the rest of the LPs staying for longer.
Premium fee eligibility is calculated on a daily basis. Premium allocation per address = ( OTM premium + Current Surplus - Exercised ) * ( Total liquidity provided by address / Total Liquidity ) where,
OTM premium: Out of money premium collected for the day
Current Surplus: The amount forfeited by early (<14 days) LP withdrawers
Exercised: Amount used for Exercising Options for the Day
The following example shows the liquidity pool participation for a user “Satoshi” for 3 days of activity. This can be used to understand premium distribution to the pool and users.
(in $$)
Day “N”
Day “N + 1”
Day “N + 2”
Available Liquidity
1,000,000
2,000,000
2,500,000
OTM Premium collected for the Day
15,000
28,000
30,000
Amount used for Exercising for the Day
5,000
8,000
10,000
Surplus from early withdrawals
0
0
200
Premium Distribution to the liquidity pool
15,000 (Premium) + 0 (Surplus) - 5,000 (Exercised) = 10,000
28,000 (Premium) + 0 (Surplus) - 8,000 (Exercised) = 20,000
30,000 (Premium) + 0 (Surplus) - 20,000 (Exercised) = 10,000
Liquidity Provided by Sathoshi
100,000 (Total: 100,000)
0 (Total: 100,000)
0 (Total: 100,000)
Liquidity Removed by Sathoshi (<14d)
0
0
10,000 (Total: 90,000)
Sathoshi’s premium forfeited
0
0
1000 * 10,000/100,000 = 100
Sathoshi’s premium eligibility^^
0
10,000 * 100,000/1,000,000 = 1,000 (Total: 1,000)
20,000 * 100,000/2,000,000 = 800 (Total: 1,700^)
^ 1,000 + 800 - 100 = 1,700 ^^ calculated based on previous day’s premium and liquidity
Options holders will be able to exercise their options at any time they wish before expiry (in case of American options). They will be required to pay settlement fees to exercise which will be equal to a percentage of the option premium. This fee will be automatically deducted from their profits (which is the amount to be transferred to the user).
Users can pay the settlement fees in the native Oddz token to get a discount.
Once the options are exercised, the required locked assets are transferred as profits.
In case of Call options, the profits are computed as: MIN(pasp, sp) - Settlement Fee, where
sp = Strike price
sf = Settlement Fee
occ = Over collateralized calculation
pasp (profit after deducting strike price) = “occ” - “sp”
In case of Put options, the profits are computed as: MIN(oap, sp) - Settlement Fee, where
sp = Strike price
sf = Settlement Fee
Occ = Over collateralized calculation
oap (over collateralized calculation adjusted profits) = “sp” - “occ”
The user has two options to claim their profits;
Cash Settlement: Transfer of the profits to the same address used while purchasing the option
Physical Settlement: A DEX swap is undertaken with the USD profit amount being used to purchase the underlying asset. The asset is then transferred to the user provided underlying asset address.
