January 24, 2023
Atlantic Perp Protection - Writer SideDopex-PapersDopex-Essentials
This post will go through some of the unique terminology and concepts that make Atlantic Options different from Dopex’s standard options from the option writer’s perspective.
Selecting your Strike Price
In contrast to weekly and monthly SSOVs where there are 4 strike rates set per epoch, Atlantic strikes are more flexible from the writer’s end. Writers select their own max strike to deposit into for an epoch with two conditions:
1. Max strike price is lower than current spot price i.e. written options must be OTM
2. Max strike price must be decrements of tick size i.e if spot: 1500 and tick size: 100; possible highest max strikes: 1400, 1300, … n - 100
Let’s take an example where the current spot price of ETH is $1,500 and three prospective strike prices.
1. Max strike price of $1,600 → strike price is greater than spot price meaning this is not possible
2. Max strike price of $1,250 → strike price is not fully divisible by 100 (the tick size) meaning this is not possible
3. Max strike price of $1,200 → strike price is both lower than the spot price AND fully divisible by 100 meaning this IS possible
As long as your chosen max strike price is below current price and fully divisible by tick size (NOTE: tick sizes are subject to change per epoch), you are good to go. With an ETH spot price of $1,500, other possible strikes could include $900, $1,000, $1,100 and so on.
Max Strikes Concept
One thing you may have noticed is that we say max strike price rather than just strike price.
When you are writing Atlantic options, the actual strike price you write for is determined by utilization of your deposit. This means when you select a max strike price of $1,000, your deposit may write options for any strike price equal to or less than $1,000 depending on what strikes buyers want.
Let’s take a look at this concept using a few examples, pretending you are the only Atlantic writer at Dopex and choose to deposit $10,000 into the max strike of $1,000. We will pretend the spot price at writing is $1,050
Scenario 1 - Full Utilization: Option buyers purchase 10 $1,000 Strike APs
If option buyers want to purchase 10 $1,000 Strike APs, they require $10,000 of liquidity (10 * $1,000).
In this scenario, you have sold 10 APs at a strike price of $1,000. Your deposit will be fully utilized to sell options.
Scenario 2 - Partial Utilization: Option buyers purchase 5 $1,000 Strike APs and 5 $900 APs
If option buyers want to purchase 5 $1,000 Strike APs and 5 $900 APs, they require $9,500 of liquidity (5 $1,000 + 5 $900).
In this scenario, you have sold 5 APs at a strike price of $1,000 and 5 APs at a strike price of $900. $500 of your deposit will not be utilized ($10,000 - $9,500).
Scenario 3 - Excess Utilization: Option buyers purchase 5 $1,000 Strike APs and 10 $900 APs
If option buyers want to purchase 5 $1,000 Strike APs and 10 $900 APs, they require $14,000 of liquidity ( 5 $1,000 + 10 $900). The AP Strike prices that you end up writing for will depend on the sequence in which these APs are purchased.
A $1,000 Strikes purchased first
The 5 $1,000 Strike APs will be filled first, leaving $5,000 liquidity ($10,000 - 5 * $1,000) remaining for 5.55 $900 Strike purchasers ($5,000/$900).
In this scenario, you have sold 5 APs at a strike price of $1,000 and 5.55 APs a strike price of $900. Your deposit will be fully utilized but the $900 strike purchasers will be unable to fully fill their orders.
B $900 Strikes purchased first
The 10 $900 Strike APs will be filled first, leaving $1,000 liquidity ($10,000 - 10 * $900) remaining for 1 $1,000 Strike purchasers ($1,000/$1,000)
In this scenario, you have sold 10 APs at a strike price of $900 and 1 AP at a strike price of $1,000. Your deposit will be fully utilized but the $1,000 strike purchasers will be unable to fully fill their orders.
Scenario 4 - Purchase Strike Exceeds Written Strike: Option buyers purchase 5 $1,100 Strike APs
If option buyers want to purchase 5 $1,100 Strike APs, they require $5,500 of liquidity (5 * $1,100). However, since $1,100 exceeds your max strike of $1,000 they will be unable to carry out their purchase.
In this scenario, you have sold 0 APs and $10,000 of your deposit will not be utilized.
In addition to this, if there are writers for multiple strikes, option purchasers will take liquidity from the highest strike available before using liquidity from the lower strikes.
Let’s take one final example where there is $5,000 deposited into the $1,000 Strike Rate and $9,000 deposited into the $900 strike rate.
Scenario 5 - Descending Liquidity: Option buyers purchase 10 $900 Strike APs
If option buyers purchase 10 $900 strike APs, they require $9,000 of liquidity (10 * $900).
They will first fully utilize the highest strike rate of $1,000 which has $5,000 in liquidity, which leaves $4,000 that still needs to be filled ($9,000 - $5,000).
They will then fill in the remaining $4,000 from the lower strike rate of $900 which has $9,000 of liquidity.
From the option buyer’s perspective, they have purchased 10 $900 Strike APs which is provided by two strike providers:
1. 1,000 strike writers provided $5,000 liquidity to write 5.55 $900 Strike APs ($5,000/$900)
2. $900 strike writers provided $4,000 liquidity to write 4.45 $900 Strike APs
In summary, the Max Strike concept is defined by a few main rules:
1. Write options for any max strike equal to or below the spot price (Scenario 1 and 2)
2. When purchases exceed available liquidity, the first purchasers will fill their positions before later purchasers (Scenario 3)
3. Option purchasers can only use liquidity from max strikes higher than or equal to the purchase strike which technically means that max strike writers are writing OTM options (Scenario 4)
4. Option purchasers will fully utilize the highest max strikes before utilizing lower strikes (Scenario 5)
As an Atlantic Perp writer, you are entitled to receive option premiums just like any standard put writer should. This premium depends on factors such as how far OTM (away from the spot price at time of writing) your written strike price is as well as the implied volatility of the underlying. Writers that select higher Max Strikes can expect to receive higher premiums but also take on more risk since a smaller price change is required for settlement to be paid.
In contrast to standard option writers, Atlantic Perp writers will also receive borrowing costs from option buyers in exchange for the use of their collateral for the duration of the protection, determined by [Collateral Borrowed * Borrowing Rate * Duration Borrowed].
Settlement for Put Options means that if the spot price of the underlying (ETH) at settlement is lower than the written strike price, the option writer’s collateral will be slashed to pay the difference to option buyers - this is known as being In-the-Money (ITM). If the spot price of the underlying is higher than the written strike price, the option writer’s collateral will be returned in full - this is known as being Out-of-The-Money (OTM).
Atlantic Puts work in exactly the same way i.e. if APs expire OTM no settlement needs to be paid whilst if they expire ITM the writer’s deposit is slashed to pay buyers.
Since writers select Max Strikes rather than individual strike prices, they may end up writing for multiple strike prices depending on option buyers. This means some of their deposit may be used to write options that are ITM and need to be settled whilst the remainder may write OTM options with that portion of their deposit returned in full.
Settlement in General
Confusing? Let’s go through some examples to clear that up.
For the following cases, assume the writer deposits $10,000 into the $1,000 Max Strike and the spot price of ETH is $950 at expiry.
Recall that the formula for settlement of a put option is given by:
Settlement = Options Written * (Strike Price - Spot Price at Settlement)
A 10 $1,000 Strike APs sold
All 10 $1,000 Strike APs expire ITM and the writer receives $9,500 (10,000 - 10[1,000 - 950]) back at expiration.
$500 goes to the Option Buyer for the 10 $1,000 Strike APs.
B 5 $1,000 and 5.55 $900 Strike APs sold
All 5 $1,000 Strike APs expire ITM and the writer receives $4,750 (5,000 - 5[1,000 - 950]) back at expiration.
$250 goes to the Option Buyers for the 5 $1,000 Strike APs
All 5.55 $900 Strike APs expire OTM and the writer receives $5,000 back at expiration.
The $900 Strike APs are OTM so no settlement is paid.
Super simple stuff!
One thing that makes APs stand out from other Dopex options is that they are asset-settled, that means if your written options expire ITM you will receive Number of Options Written ITM * Underlying. The nuances of this are explored in Atlantic Perp Protection - Buyer Side but in essence this means if you have 10 ITM options at expiration, you will receive your deposit back as 10 ETH rather than your original stablecoin deposit (we call that "buying the dip" where I'm from).
For the following example we will also assume the writer deposits $10,000 into the $1,000 Max Strike and the spot price of ETH is $950 at expiry.
10 $1,000 Strike APs sold; Asset-Settled
All 10 $1,000 Strike APs expire ITM and the writer receives 10 ETH back at expiration.
The value of 10 ETH at the current spot price of $950 means the writer receives the equivalent of $9,500 in assets back at expiration.
$500 goes to the Option Buyer for the 10 $1,000 Strike APs [10 * (1,000 - 950) = $500] (technically this is used to offset their losses on their long position)
We hope that this lovely little article explains to you (our silly beans) how you can write Atlantic Options to be used to earn premiums and borrowing costs to power our Atlantic Perp Protection engine. As usual, if anyone has any questions please feel free to jump into our Discord which is linked below.
Until next time, my loyal students.
CEO (Chief Education Officer, not to be confused with Nutoro, our Chief Executive Officer)
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner.
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