Introduction🎢
Presenting: Option Liquidity Pools, a method for users to exit their options positions mid-epoch while still maintaining the benefits of them being European.🚀
Dopex is yet again delivering innovation to its Users, this time in the form of a new system named OLP or Option Liquidity Pools. The concept is relatively straightforward and clear though we expect it to be one that will improve User experience handsomely. This short article will cover the basis and everything else needed to understand OLP. Let's begin with the basics.
What are Option Liquidity Pools?🎪
OLP is a new system 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.
Let’s go over the steps from each user's perspective:
Option Liquidity Provider:💰
1. Choose the underlying and the strike from the available SSOV vaults that you’d like to provide liquidity for.( E.g., $ETH at 1300$ Strike)
2. Choose the implied volatility discount (1-100%) that'll be applied to the option Black-Scholes pricing formula whenever a purchase is made ( E.g., If $ETH IV is 100 and the User inputs a 10% discount, the option pricing formula will be calculated considering a 90 IV)
3. Deposit the amount of liquidity you wish to spend on the selected discounted option (Deposit liquidity in USDC or the underlying for both calls and puts)
4. Once the order is completed, the collateral is automatically added to the OLP page in an order book style. The order can be closed anytime by pressing the “Kill” position button.
Option Buyer:🛒
1. Every purchase of SSOV Options comes with a receipt token as proof of purchase. OLP uses this token as a transfer medium to swap against the liquidity provider's order.
2. The OLP page displays the liquidity available at different strikes and discount tiers sorted in ascending order.
3. Option Token Holders can sell their position into OLP anytime during the epoch as long as the 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 press “Fill”. Filling automatically sells your Option position at the current market price - the selected IV discount rate. (E.g., If the price of the asset went ITM, you could take profits through OLP selling)
As you can see, OLP is a new instrument that benefits both sides. Below are listed some of the nuisances SSOV Users experienced, and further down, how OLP's resolve them.
SSOV Nuisances🪓
- Illiquid Option positions (taking profits or exiting for X reason)
- Non-recyclable Option liquidity
- Can't purchase mid-epoch positions at a discount
OLP Solutions🏆
- Exit Option Positions at any time (Taking profits or exiting for X reason)
- Recyclable Option Liquidity (Option contracts can be re-used numerous times, improving liquidity efficiency)
- Possibility to purchase Options mid-epoch at a discount creating an option pricing floor that can theoretically be arbitraged against
Example Use-Cases🤝
As an option buyer, you are betting on the direction of an asset, but more often than not, this bet is made over an approximate range where you hope it hits near the ballpark. E.g. You believe $ETH will pump this month but don't know what date exactly and want to risk it by purchasing a monthly $ETH Option. With European options, you would need to wait until expiration to take profits from the options settling, causing the last few hours/days of the contract to be critical. But with OLP, your bet can be correct at any time throughout the epoch, and you could cash in profits without sacrificing an option's time value (Theta).
Use-cases include:
- Take Call Option profits
- Take Put Option profits
- Purchase discounted Option positions
- Purchasing discounted options create Arbitrage opportunities through external protocols/tools (Unlocks having a floor by integrating MMs)
Conclusion🚩
OLP's are an ideal integration that makes Dopex options more compelling than ever to its buyers. To enhance the user experience, we intend to recruit MMs to ensure a substantial foundation of liquidity, allowing users to exit their position at any time. As opportunities present themselves, Dopex adapts. Innovation is at the foot of everything we do at Dopex, and we hope our community will be with us as we move forward. With that said, we hope this release improves your User experience overall, and we honestly can't wait to show you all what we have in store for the next few months! See you all soon!🖐
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📃 About Dopex
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.
Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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