# FAQ

## What are options? <a href="#eef2" id="eef2"></a>

An option is an agreement between two parties: a seller and a buyer. The seller writes the contract terms and sells it to the buyer for a premium. That means the seller now has an obligation and the buyer has a right (but not an obligation) to exercise the contract terms upon expiration.

## What are American options? <a href="#id-6e46" id="id-6e46"></a>

There are two types of options: European and American. European options are a point in time instrument since they allow the user to exercise **only** at the expiration date. On the contrary, American options are a continuous time instrument since they allow the user to exercise the contract **anytime before the expiration.**

## **What types of options are there?** <a href="#ec54" id="ec54"></a>

There are two basic types of options: puts and calls. A put represents the right to **sell** the underlying asset at the strike price. On the other hand, a call represents the right to **buy** an asset at the strike price.

## What is an odToken? <a href="#e318" id="e318"></a>

odtokens is our primitive. It is an ERC-20 that represents a right granted to its holder. This means that whoever minted odtokens, issued an obligation to comply with the contract terms at any moment until the expiration (considering American options - which is our case). This obligation is sold for a price (premium) to a buyer. In other words, the buyer purchase the right to exercise the contract terms at any moment until the expiration.

> odtokens are minted with a 1:1 parity to its collateral.

## What is an podToken? <a href="#e318" id="e318"></a>

Is the token that represents a put option.

## What is an codToken? <a href="#e318" id="e318"></a>

Is the token that represents a call option.

## What is an option series and how does it work? <a href="#id-5977" id="id-5977"></a>

An **option series** is defined by a unique combination of underlying asset, strike asset, strike price and maturity, and each option is fungible inside its own series.

## What is a strike price? <a href="#id-2f53" id="id-2f53"></a>

Strike price is the term commonly used to designate the price which the underlying asset will be sold or bought for in the future.

## How is the options premium calculated? <a href="#b95b" id="b95b"></a>

In traditional finance, options premium's are rather hard to calculate and there are several pricing models out there. The most widely used is Black-Scholes and it takes into account factors like intrinsic value, time to expiration, and underlying asset volatility. Our protocol is optimized for market liquidity on Uniswap. That means the premium, or price of odtokens per expiration, is set based on supply and demand of odToken pool on Uniswap.

## What asset can I offer as collateral for writing a put? <a href="#id-4d0f" id="id-4d0f"></a>

While interacting with the ETH:DAI options we have live, the collateral asset depends on the type of the options you're minting. If you are minting a put option, you have to lock DAI. If you're minting a call option, you have to lock ETH.

## If I have odtokens and I want to exercise it, what should I do? <a href="#cc08" id="cc08"></a>

Enter the website, connect your MetaMask wallet and go to [Writer](https://writer.ohmydefi.com/). There you should hit "buy" and then hit "Exercise". You'll be able to execute your position, giving the amount of odtokens you own.

## If I sold odtokens and expiration has not reached yet, how can I exit my position? <a href="#f9ef" id="f9ef"></a>

There is no way to "undo" or execute you position if you minted odtokens. What you can do to stop your exposure to ETH:DAI is to buy the same amount of odtokens you minted from another seller and send them to the contract to unlock your collateral. This works almost as an **unwind** of your position. In that case, you'd be subjected to the current premium the market is trading. That means you could either benefit or get a loss with this unwind trade.

## What is the buyer's potential PnL (Profit and Loss)? <a href="#d8dc" id="d8dc"></a>

*Quick recap:* a buyer is someone who owns podtokens and, therefore, it has the **right to sell** the underlying asset for the strike price at any time until the expiration.

The PnL of an option is a function of strike price and the current market price (spot price) of the underlying asset. So, in the case of an ETH:DAI **put option**, the PnL depends on what is the current market price of ETH, in terms of DAI.

Imagine that the buyer bought 1 podtoken for a 3 DAI premium. If ETH is trading at 100 DAI (every ETH costs 100 DAI) and strike price was 150, we say that this option is *in-the-money* and the buyer would have a profit when exercising it. In this case, the buyer should exercise the option and "sell ETH" that currently costs 100 DAI for 150 DAI. This payoff would be 47 DAI.

$$
Strike Price - Spot price - Premium = Buyer's Payoff
$$

$$
150-100-3 = 47
$$

But, if ETH's price is trading above the strike price there’s no reason for the buyer to execute the option (we say that this option is *out-of-the-money*). This means that the payoff PnL is actually a loss of the premium paid.

![Payoff chart for buying a put option on ETH:DAI](https://3066522550-files.gitbook.io/~/files/v0/b/gitbook-legacy-files/o/assets%2F-M8NMrlmIGRBh6ZVVjPB%2F-MAO5fzkH0UdJql3TzQp%2F-MAO89_OcDg0g158bUkt%2FScreen%20Shot%202020-06-21%20at%208.09.06%20PM.png?alt=media\&token=9bc978bb-ef82-404b-bab7-959bb5c8aef1)

Observing the buyer's payoff, one can see that the buyer can only profit in case the price of the underlying asset **falls bellow the strike price**. This means that by buying podtokens one can protect against **downside volatility.**

## What is the seller's potential PnL? <a href="#id-1501" id="id-1501"></a>

*Quick recap:* a seller is someone who minted and sold podtokens in the past and now holds an obligation towards the buyer. This obligation is guaranteed by the collateral the seller provided in the contract. That means that whenever the buyer wants to exercise podtokens, the seller's collateral will be used to buy underlying asset from the option holder at the strike price.

The PnL of an option is a function of a the strike price and the current market price (spot price) of the underlying asset. So, in our case, the PnL depends on what is the current market price of ETH, in terms of DAI.

Imagine that the seller sold 1 unit of podtoken at a premium of 3 USDC and had exactly 150 DAI locked in as collateral, considering a strike price of 150 DAI pert unit of ETH. If ETH is trading at 100 DAI, we say that this option is *in-the-money* and the seller is forced to commit to it's contract by repurchasing 1 unit of ETH for 150 DAI.&#x20;

That represents a 47 DAI loss for the seller because it had to comply with the contract and buy ETH at 150 DAI while ETH was trading at 100 DAI in the market. Notice that the buyer's profit is always equal to the loss of the seller.

![Payoff chart for selling a put option on ETH:DAI](https://3066522550-files.gitbook.io/~/files/v0/b/gitbook-legacy-files/o/assets%2F-M8NMrlmIGRBh6ZVVjPB%2F-MAO5fzkH0UdJql3TzQp%2F-MAO9qnfCwY6VCxM4uix%2FScreen%20Shot%202020-06-21%20at%208.16.27%20PM.png?alt=media\&token=95b9745e-cff7-4540-9e07-77392dd81d3a)

Observing the seller’s payoff one can see that sellers of put options only profit if the underlying asset do not fall below the strike price.

## Why can't I set a price of the put I'm writing? <a href="#id-2b36" id="id-2b36"></a>

To increase liquidity and make it easier to implement, we chose to sell odtokens on Uniswap. That means the price of the odtokens depends purely of the liquidity pool available on Uniswap for each series.

## What happens if I have collateral locked and expiration is reached? <a href="#id-9260" id="id-9260"></a>

If you minted odtokens and therefore locked the equivalent amount of DAI our ETH, your option can be exercised by the buyer until the expiration is reached. If the expiration was reached and your option was not exercised, you can unlock the collateral from the contract.

## Why don't we use a price oracle? <a href="#id-5250" id="id-5250"></a>

An option can be exercised in two ways: **cash** or **physical settlement**. Cash settlement assumes that only the difference between the counterparts should be offset, that also means that the margin required for the contract to be valid could be smaller. On the other hand, physical settlement assumes that all the collateral or margin held in custody will be exercised.

Cash settlement requires a price oracle to work in a blockchain fashion. Physical settlement don't! That means by choosing to do physical settlement we are not exposed to price oracles risks.

## **Why do we need a token for writing options on chain?** <a href="#id-195b" id="id-195b"></a>

By using odTokens to allow writing and trading options on chain we are also saying that the option contract is tokenized. That is an important feature to increase overall liquidity of the system and it makes it easier to integrate with other DEX and protocols since its a generic ERC20 token.

Still have questions? Reach out to us on our channels.

* [Twitter](https://twitter.com/PodsFinance)
* [Discord](https://discord.gg/Qf7utym)
