Buying Options

An explanation of buying binary options and what takes place at the protocol level.

Binary options are speculative financial instruments that derive their value from some other asset or quantity. Eventually, all binary options are either completely worthless or become worth a specific calculable amount in the future.

This section on buying options was taken from the detailed explanation provided on Medium. To skip the theory and dive straight into trading, check out the instruction manuals.

Price Speculation

BIOPset facilitates price speculation. The whole purpose of buying binary options is to take a position in the direction of movement in prices.

Binary options are essentially all or nothing financial derivatives. Traders either win or lose. There’s no in-between (or other possible outcomes).

They are called derivatives because their value is derived from something else after a certain period of time. After that period of time, the options are said to have expired. That something else from which binary options derive their value is called the underlying (or underlying asset).

In BIOPset V4, the utilized information feeds are provided by Chainlink. However, the underlying needn’t be a financial asset or cryptocurrency. It could be the quality of the weather (like a rainy day) or something else that will have an attribute that changes in the future. [1]

Binary options are speculative instruments. Those that purchase them (options buyers or options holders) usually have a strong opinion about the future state of some phenomenon. In BIOPset V4, traders that buy binary options typically have a serious opinion about the future price of their chosen price trading pair (i.e. BTC/USD).

More precisely, traders are actively engaged in forecasting the direction of the movements in the price of the underlying asset. They are not passively buying options because they want to save money. WARNING: never use your savings.

Traders use the platform to make money based on what (they think) they know about the future.

Options Buyers

Options buyers hold an opinion about the direction of movement in the price of BTC/USD. There are only two directions: up or down. They choose one.

For example, Alice believes that BTC/USD prices are going up. She feels very strongly that this will come to pass. Alice is willing to commit 10 ETH on that opinion and takes "up" the position against a pool of option sellers on BIOPset.

Options Sellers

Options sellers must hold the opposing view about the future price of BTC/USD. By definition, the option seller is the counterparty and takes the opposition position.

In BIOPset, no individual seller holds the opposing view alone. The sellers as a group hold the opposing view in proportion to the funds committed to the pool (or house).

Considering Alice's strong opinion, the pool is obliged to take the opposing view and commits 10 ETH to prices going "down".

Calls And Puts

Traders that want to make money on an appreciation in the price of BTC purchase calls. Those prognosticating a price decrease purchase puts.

Only price direction matters.

It never matters how much the price increases or decreases. In BIOPset, call holders win whether the price of BTC increases by one dollar or one thousand dollars. Similarly, put holders win whether the price of BTC decreases by one dollar or one thousand dollars.

Strike Price

The price of BTC at the moment the binary option is purchased is the strike price of a binary option on BIOPset. It is always displayed on the BIOPset UI.

The strike price cannot be set manually by traders. It is generated automatically with a value received from the price oracle. This means that all options on BIOPset have an at-the-money (or "ATM") strike price. For example, if the price of ETH is $1,900, the binary option will be created with a $1,900 strike price (not with a $1,800 or $2,000 strike price).

To be precise, for a BTC option it is the price of BTC at the moment the option was purchased according to the Chainlink Oracle. This is important to note because the value of the option changes based on this strike price.

Put holders can settle their options if the strike price exceeds the price of BTC when the first update from the oracle is received (meaning the price went down since option creation). Call holders can settle their options if the price of BTC when the first update from the oracle exceeds the strike price (meaning the price went up since option creation).

Expiration

At expiration, traditional binary options are always worthless (or possess zero intrinsic value). The intrinsic value that they possessed has expired. At that point, the right to exercise them no longer exists.

The concept of expiration does not exist with BIOPset. Expiration is set to infinity. That's because the value of the option is determined by the oracle update received.

Settlement

Any person or bot may also settle the option and receive the 0.2% settlement fee after the oracle update is received.

Consequently, the call or put holder can settle the option themselves and collect that 0.2% fee. In such cases, the payout of the option is 99%. (BIOPset charges 1% transaction fee.)

Otherwise, any arbitrary platform participant can settle the option if it is in their financial interest and collect the 0.2% fee. In such cases, the payout of the option drops to 98.8% (as 0.2% is paid to the person/bot that settles the option).

The settlement role transactions are always risk-free. The exact payoff is viewable before this action is taken.