What are Options?

(Optional) Basic Options Explained

Options give traders unique ways to leverage, speculate, or hedge risk on an underlying asset. They come in a wide variety and can be structured in near-infinite ways to create a desired payout.

A basic options contract offers the buyer the opportunity to buy or sell (depending on the type of contract they hold) the underlying asset by a certain date at a certain price.

Key characteristics of an option include:

• Underlying Asset: The financial asset that the option applies to, such as ETH, BTC, you name it.

• Strike Price: The price at which the holder of the option can buy (for a call option) or sell (for a put option) the underlying asset.

• Expiration Date: The date when the final value of the option is determined.

NOTE: On Smilee, a trader can buy/sell options anytime they’d like before the expiration date thanks to the Smilee AMM.

• Premium: This is the price the buyer of the option pays to the seller of the option to enjoy the right that the option provides.

Example:

Let’s say Chad buys a Call option (paying the premium) that gives him the right to buy ETH at $2,000 (strike price) by the end of the week (expiration date).

• At the end of the week, If the ETH price is greater than $2,000, he wins! Chad can buy ETH at $2,000 and sell it at a higher price.

• However, if the ETH price is less than $2,000, it does not make sense to use his right to buy ETH at $2,000 so he simply loses the premium paid.

Graphically, his payoff (aka how much Chad earns or loses for different prices of ETH) is:

Two important things to notice:

• Chad never loses more than the premium (he cannot get liquidated!).

• Chad can make big money for a relatively smol premium (he enjoys huge leverage!).

Many people use options to simply gain leveraged exposure on an underlying asset, but options are also widely used as a tool to build complex position structures by giga brains.