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 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.
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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.