Option Liquidity Pools
OLP is a new system (A Secondary Option Market) built on top of our well-known SSOV product. As the name indicates, they are simply pools that allow the purchasing of SSOV option tokens at an implied volatility discount in exchange for providing anytime exit liquidity to option buyers. In simpler terms, Buyers of SSOV options may exit their position into option liquidity pools at any time in exchange for a discounted price.
A perspective from each User's point of view:
- 1.Select the underlying and strike price from available SSOV vaults for which you'd like to provide liquidity (e.g. $ETH at $1300 strike).
- 2.Choose the implied volatility discount (1-100%) that will be applied to the option's Black-Scholes pricing formula whenever a purchase is made (e.g. if $ETH IV is 100 and you input a 10% discount, the option pricing formula will be calculated with a 90 IV).
- 3.Deposit the amount of liquidity you wish to spend on the selected discounted option (in USDC or the underlying asset for both calls and puts).
- 4.Once the order is completed, your collateral is automatically added to the OLP page in an order book format. You can close the order anytime by clicking the "Kill" position button.
- 1.Every SSOV option purchase comes with a receipt token as proof of purchase. OLP uses this token as a transfer medium to swap against liquidity provider orders.
- 2.The OLP page displays available liquidity at different strike prices and discount tiers, sorted in ascending order.
- 3.Option token holders can sell their position into OLP at any time during the epoch as long as liquidity is available.
- 4.To sell your tokenized option position, select the discount rate at which liquidity is available for the amount you need to sell and click "Fill." Filling automatically sells your option position at the current market price minus the selected IV discount rate. (e.g., If the asset's price goes in-the-money, you can take profits through OLP selling.)
Overall, OLP is a new instrument that benefits both liquidity providers and option holders. It resolves some of the nuisances that SSOV users previously experienced.
- Illiquid option positions, making it difficult to exit for taking profits or other reasons.
- Non-recyclable option liquidity, limiting the efficiency of liquidity.
- Inability to purchase mid-epoch positions at a discount.
- Option positions can be exited at any time, allowing for taking profits or exiting for other reasons.
- Option liquidity is recyclable, meaning option contracts can be re-used numerous times to improve liquidity efficiency.
- Possibility to purchase options mid-epoch at a discount, creating an option pricing floor that can theoretically be arbitraged against.
As an option buyer, you may be betting on the direction of an asset, but the bet is often made over an approximate range. For instance, you may believe that $ETH will increase in value this month but don't know the exact date, so you decide to purchase a monthly $ETH option. With European options, you would have to wait until expiration to take profits when the options settle, causing the contract's last few hours or days to be crucial. However, with OLP, your bet can be correct at any time throughout the epoch, and you can cash in profits without sacrificing an option's time value (Theta).
- Taking profits on call options
- Taking profits on put options
- Purchasing discounted option positions
- Purchasing discounted options creates arbitrage opportunities through external protocols or tools, unlocking a floor by integrating market makers.