⁉️What Are Options

Options can be quite difficult for many investors to fully grasp, so we've put together a brief primer on the basics of option markets!

Options are financial instruments used by investors to buy or sell an underlying asset at a specified date and price (called the strike price).

On IVX, options come in two types:

• Call Options: The right to purchase a specified amount of tokens at a strike price at the option's time of expiry.

• Put Options: The right to sell a specified amount of tokens at a strike price at the option's time of expiry.

In theory, an investor can purchase a call when he/she expects an underlying asset's price to increase, and can buy a put when they believe the price will decrease.

Key Terms

Strike Price - The agreed price at which an asset may be bought or sold under the terms of the option contract (also called the "exercise price").

In-The-Money (ITM) - For a call option, this means that the asset price is above the strike price. For a put option, this means that the asset price is below the strike price.

Out-of-The-Money (OTM) — For a call option, this means the asset price is below the strike price. For a put option, this means the asset price is above the strike price.

At-The-Money (ATM) — An option is “at-the-money” when the asset price is roughly equal to the strike price.

Options Premium

The price of an option is called its 'premium'. The value of this premium often changes throughout the life of an option in response to the price changes in the underlying asset, its time to expiry, the distance from strike price and several other factors including the 'Greeks'.

The main factors which determine this price are:

Price

An option has 'intrinsic value' when it's in-the-money. If the strike price for a Bitcoin call option is $20,000, with a current market price is $21,000, the $1,000 is equal to the profit you'd receive when you exercise this option. This $1,000 of intrinsic value will be reflected in the price of this option.

Time

​The longer the time left until an option expiry, the greater amount of time there is for the underlying asset to move. This means that an options price increases with a longer time to expiry.

Implied Volatility (IV)

The IV of an asset is the market's forecast of a likely movement in its price. It's used by investors to estimate future 'volatility' based on various factors.

The higher the IV of an asset, the more it's expected to move, thus the higher the price of its option.

An assets price and its time to expiry are publicly available parameters, thus the IV is a huge driver of an options price differentials between traders. We go more into how we model volatility in our protocol here.