Options Trading
Traders can trade NFT call and put options against liquidity pools with OTM (out-of-the-money) strikes, as well as flexible expiration dates. NFTCall Surge uses floor prices to evaluate the market price of each NFT collection uniformly.
NFTCall Surge options are European-style options, which means they can only be exercised at expiration. All options are settled in WETH.
Opening a position
When opening an option position, the options contract buyer first need to select the NFT collection, size, strike price and expiration date for the contract. The underlying NFT collection is the underlying asset of the contract. The size refers to the number of options contracts being acquired. The pre-determined price the option buyer can buy at is called the strike price. The expiration date is the date that the option contract becomes void and worthless.
Premium will be calculated for the chosen NFT collection, size, strike price and expiration date for an option contract. After that, the buyer will be asked to pay this amount in WETH using their wallet. After payment, the buyer will receive an ERC721 option token that represents the bought option.
NFT collection
The option buyer needs to select an underlying NFT collection for the option contract.
NFTCall Surge currently supports following blue-chip NFT collections:
Bored Ape Yacht Club
Mutant Ape Yacht Club
Azuki
Doodles
CloneX
Moonbirds
Size
The size is allowed to be a decimal, so traders can flexibly choose the position they can afford and gain exposure to blue-chip NFTs.
For example, a trader can buy 0.1 Bored Ape Yacht Club options contract.
Due to the risk control settings of the ncETH vault, the size limit available for each NFT collection when opening a position is different.
Strike price
For call options, option buyers can choose any OTM (out-of-the-money) price between +5% and +100% of the market price.
For put options, option buyers can choose any OTM (out-of-the-money) price between -5% and -60% of the market price.
Example: Let’s say the floor price of BAYC is 100ETH, the OTM strikes that will be available for trading are:
For call options: 110 ETH - 200 ETH
For pub options: 40 ETH - 90 ETH
The floor price is quoted from the oracle. When the oracle price changes, the corresponding range of selectable strike price will also change accordingly. The oracle price may have a slight difference from the real-time price.
Expiration date
The duration of the option contract ranges from 3 to 28 days, so the expiration date must fall within this range.
Premium
The options buyer needs to pay a small premium for each option position. Premium is calculated for the chosen NFT collection, size, strike price and expiration date using Black-Scholes model.
To hedge market risks, premium will be also adjusted based on the position, delta and PnL of the ncETH vault.
Notice that there will a minimum premium limit based the size and expiration date of an option.
You can find the details in the Options Pricing section.
Settlement
NFTCall Surge options are European-style options, which means they can only be exercised at expiration. All options are settled in WETH.
At expiration, the option will be settled automatically by keepers if the strike price is reached and the option value exceeds the exercise fee.
Profit and Loss (PNL)
PNL is calculated using the following formula:
Options value are composed of two parts: intrinsic and time value.
Intrinsic value is the price difference between the current floor price and the strike price. See Options payoff.
Time value is essentially linked to the probability that the option will expire in-the-money (with positive intrinsic value).
Time value is high when more time is remaining until expiry since investors have a higher probability that the contract will be profitable.
As the time to expiration approaches, the chances of a large enough swing in the underlying's price to bring the contract in-the-money diminishes, along with the time value.
Therefore, if the strike price is not reached, you will see a negative PNL on your options position. However, due to NFTCall Surge's AMM mechanism, you will see a positive PNL on positions that are in the opposite direction of most positions.
Limited payout for call options
For call options, as there is no upper limit to the price rise, option sellers may have to bear unlimited risks. Therefore, the vault only provides limited payout for call options buyers. This means that the maximum payout from the vault equals to the current floor price. At the same time, in order to compensate traders, the protocol will adjust down the premium for buying call options.
Please see more details about the limited payout.
Fees
| Fee | Description |
|---|---|
Exercise fee | 0.5% of the notional value, 12.5% of the option value, whichever is lower, will be charged when a position is exercised. |
Execution Fee | 0.00005 WETH per position |
Exercise fee
When an option is exercised, a exercise fee will be charged by the protocol, which is 0.5% of the notional value or 12.5% of the option value, whichever is lower.
The option can only be exercised when the strike price of the option is reached and the option value is positive. Otherwise, the option will be invalid and no exercise fee will be charged.
The exercise fee will be sent to the backstop pool to deal with certain special situations, such as the loss of the liquidity pool.
Execution Fee
There are two transactions involved in opening a position:
User sends the first transaction to request open
Keepers observe the blockchain for these requests then execute them
If the position cannot be executed within the allowed slippage the request is cancelled and the funds are sent back to the user
If the keeper fails to execute the position, the users can cancel the request manually.
For exercising an option, user does not need to send a request, the keepers will automatically execute a transaction to exercise the option.
The cost of the transaction executed by the keepers is displayed in the trading panel as the "Execution Fee", which is currently set at 0.00005 WETH per position. This network cost is paid to the blockchain network.
Slippage
There is a tiny time lapse between when a user sends a request and a keeper executes it. And the floor price and volatility may fluctuate during this period, so the keeper will request the real-time data to calculate premiums, resulting in changes in option costs compared to when users send their requests.
Therefore, when users send requests, the protocol will ask them to pay slightly higher than the calculated premium to guarantee the success rate of executing positions. The portion exceeding the calculated premium is determined by the slippage which is controlled by the user.
After successful opening a position, any excess fees will be refunded to the user.
5% is a reasonable allowed slippage. Note that a low allowed slippage, e.g. less than 0.5%, may result in failed orders if prices are volatile.
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