Feature Overview

Eve Options - Exploring the Mechanics

Eve Options introduces a unique approach to options trading by allowing users not only to trade Put & Call Options but also to create (write) options for others to trade.

Take note that Version 1 options are fully collateralized & physically settled. Before delving into the specifics, let's clarify what these two fundamental statements mean in the context of Eve Exchange.

Fully Collateralized

Being fully collateralized signifies that the complete collateral required to settle an option trade has been deposited by the option writer and is securely locked within the smart contract. If the premium has been paid, the writer cannot withdraw these funds unless the option expires without being exercised.

• For a Put option, this entails that the total quantity (strike price times quantity) of the specified stablecoin is immobilised within the smart contract.

• For a Call option, this involves locking the total quantity (strike price times quantity) of the underlying asset within the smart contract.

Physically Settled

Physically settled means that upon the exercise of the option, the smart contract will deliver the full quantity of the corresponding asset directly to the trader's wallet.

• In the case of a Put option, this means that if a trader chooses to exercise the option by selling their assets, they will receive the indicated stablecoin.

• For a Call option, this implies that if a trader opts to exercise the option by purchasing the asset with the indicated stablecoin, they will receive the underlying asset.

Additional Insights

Eve options diverge from the conventions of options trading on other platforms. To avoid confusion, let's clarify three core areas that differentiate Eve's options from traditional options.

Duration (Expiry Periods)

Unlike conventional options with predetermined durations (e.g., weekly, bi-weekly, monthly, quarterly), the duration of an Eve option is determined by the option's writer.

Writers enjoy the freedom to set any duration, potentially resulting in a wide spectrum of expiry periods, ranging from a few days to several months or even years.

Importantly, expiry periods are displayed in real-time and countdown to expiration in seconds.

Premiums (Options Pricing)

In contrast to traditional options, which are priced using specific mathematical formulas, the premiums for options on Eve Exchange are manually established by the option's writer.

Writers have the flexibility to set any premium they deem appropriate, leading to the possibility of observing two options with identical characteristics but varying premium costs. Consequently, it's advisable to seek out the most competitive premium fee.

It's worth noting that premiums progressively decrease in a linear fashion based on the option's duration. For instance, if the expiry period spans 100 days, the premium will decrease by 1% per day over those 100 days, with the reduction calculated on a per-second basis.

Contract Size

Unlike conventional options, which possess a standardised size denomination (e.g., each contract equals 0.1 ETH, for example), each option ‘contract’ on Eve Exchange is the total trade size - as a trader, you pay a premium that reflects the entire trade size and cannot partially fill the order.

Summary

Familiarity with options trading reveals that the structure of Eve options is experimental in nature, a deliberate choice to observe how the market responds. This experimental structure is likely to persist as a permissionless protocol even after the launch of version 2 which will have a more familiar and standard structure.

While it may take a moment to grasp, the structure of v1 offers greater flexibility compared to other non-custodial DeFi options trading solutions and CeFi options. Moreover, anyone can be a liquidity provider and can create options for any supported token, which is not possible elsewhere.

In the upcoming sections, we'll break down the complete process, starting with creating (writing) options and subsequently moving on to trading them.