Learn NFT Options
What is an NFT Option?
An option gives the holder the right to buy (call option) or sell (put option) an asset at a specified price (the strike price) at a certain time (expiration).
Example: The ETH 3000 strike call expiring in 14 days gives the holder the right to purchase 1 ETH for $3000 in 14 days' time.
Options are one of the most traded products in global financial markets. NFTCall introduce this simple definition into the NFT world, giving a universe of possibility to NFT traders.
In terms of NFT options, the example above would change into:
NFT Option Example: The BAYC #3211 75 strike call expiring in 14 days gives the holder the right to purchase the Ape NFT for 75 ETH in 14 days' time.
Terminology
NFT Options
Call & Put: There are two kinds of options, calls and puts. Calls allow the holder to lock in a price at which to buy the NFT. Puts allow the holder to lock in the selling price. You buy calls when you think the NFT floor price will go up, and you buy puts when you think it’ll go down.
Strike Price: An NFT option gives the holder the right to buy or sell a particular NFT at a specified price (the strike price) for a certain period of time.
Expiration Date: Options don’t last forever, though, they have an expiration date. After this date, the holder can no longer buy or sell the NFT at the strike price and the option is worthless.
Premium: The option premium is the total amount that options buyers pay for an option. The option premium is higher for NFT collections with higher floor price volatility in the recent past.
Exercise: In NFT options trading, "to exercise" means to put into effect the right to buy or sell the underlying NFT that is specified in the options contract. If the holder of a call option exercises the contract, they will buy the underlying NFT at a stated price before expiration date.
Options can have many different strike prices, and many expiries, giving traders a variety of potential hedging solutions.
Settlement
There are two forms of options settlement: physical and cash settlement.
Physical Settlement: With a physical settlement, the trade completes with the transfer of the underlying NFT from the seller to the buyer. A call option holder exercises the option on a specific NFT. The options seller must then sell the NFT to the buyer of the options at the strike price.
Cash Settlement: Cash-settled options are trades that pay out in cash (ETH) at expiration, rather than delivering the underlying NFT.
NFTCall allows traders to trade cash-settled NFT options by utilizing liquidity pools. Compared to NFT-settled options, NFTCall’s cash-settled NFT options creates a more flexible trading experience without royalties and provides a lower entry barriers for traders who are interested in gaining exposure to NFT price fluctuations.
Options Payoff
The payoff of an NFT option is the profit or loss that the holder of the option receives at the expiration date of the option. The payoff depends on the floor price of the underlying NFT at the expiration date and the strike price of the option.
There are two types of options:
Call Option
The payoff of a call option is calculated as the difference between the floor price of the underlying NFT and the strike price, if the floor price of the underlying NFT is higher than the strike price at the expiration date.
If the floor price of the underlying NFT is lower than the strike price at the expiration date, the payoff is zero.
Example: Suppose you bought a call option on Bored Ape Yacht Club with a strike price of 50 ETH and an expiration date of March 31. If the floor price of Bored Ape Yacht Club on March 31 is 60 ETH, the payoff of the call option would be 10 ETH (the difference between 60 ETH and 50 ETH). If the price of Bored Ape Yacht Club on March 31 is 40 ETH, the payoff of the call option would be zero.
Put Option
The payoff of a put option is calculated as the difference between the strike price and the floor price of the underlying NFT, if the floor price of the underlying NFT is lower than the strike price at the expiration date.
If the floor price of the underlying NFT is higher than the strike price at the expiration date, the payoff is zero.
Example: Suppose you bought a put option on Bored Ape Yacht Club with a strike price of 80 ETH and an expiration date of March 31. If the floor price of Bored Ape Yacht Club on March 31 is 70 ETH, the payoff of the put option would be 10 ETH (the difference between 80 ETH and 70 ETH). If the price of Bored Ape Yacht Club on March 31 is 90 ETH, the payoff of the put option would be zero.
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