How to trade options on Lyra
A short overview
What are options and how they can be traded on Lyra DApp
An option is a type of derivative contract meaning it derives its value from the performance of an underlying entity. There are two types of options available
- American: Where a buyer can exercise the contract at any time before the expiry date
- European: Where a buyer can only exercise the contract at the moment of expiry
Lyra, a novel automated market maker (AMM) for trading European options. You can see the difference clearly from above. Now let's look at the two types of options available to trade.
- Call option: The right to buy the underlying asset
- Put option: The right to sell the underlying asset
One can either buy a call option or sell a call option, buy a put option or sell a Put option accordingly.
Let's get familiar with some trading slang before that
Strike price: the set price at which the derivative contract can be bought or sold when it is exercised
Breakeven: For an options contract, the break-even price is that level in underlying security when it covers an option’s premium
Premium: An option premium is a price that traders pay for a put or call options contract
Implied Volatility: It is the market expectation of the volatility of the underlying asset until the expiry
Let's take a look at the above image for an example of how the trading options contract looks like in Lyra DApp. Here the underlying asset selected is Ethereum. The buy option is underlined and the call option is selected. The expiration of the contract is set to 9th August 2021, 11:30 AM. Below we can see a certain amount of strike prices for example $2690, $2510 and breakeven, implied volatility, and the price.
If you want to purchase a buy call of $2690 then the premium you pay here is $438.68 you can also increase the number of contracts you want to buy so does the premium. Your premium will break even when the price of Ethereum reaches $3124.68.
In the same way, if you want to sell a call option you'll have to select the sell option check the below image for reference.
Who are Automated Market Makers (AMM)
AMMs are agents that pool liquidity and make it available to traders according to an algorithm. The smart contract paradigm introduced by Ethereum — in which code can store value and transform it programmatically — has enabled the rise of AMMs. LPs deposit funds trustlessly and participate as market makers, according to the functions defined in the smart contracts. Traders have permissionless access to buy and sell the underlying product. Decentralized AMMs have been able to efficiently aggregate liquidity, improving the trading experience across many types of assets and products. However, LPs incur the risks of market-making, known as “impermanent loss” (IL). Trading fees must exceed IL, which occurs when the fees from uninformed flow exceed losses incurred from the toxic flow.
More Details about options trading with LYRA DAPP
Check their Discord: https://discord.com/invite/P49mj6UbmC
Website: https://www.lyra.finance/
Whitepaper: https://www.lyra.finance/files/whitepaper.pdf
