3.11 Options Trading

3.11.1 What are Options?

Options are financial derivatives that give traders the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) before or on a specific expiration date. On the LQDTY platform, options trading is integrated into the blockchain infrastructure, providing decentralized and secure access to these instruments. This feature allows traders to hedge their positions, speculate on price movements, and enhance portfolio strategies with flexibility and control.

Unlike perpetual futures, options limit the risk to the premium the buyer pays, making them an appealing choice for traders who wish to control risk exposure while maintaining potential upside.

3.11.2 Key Terminology

To understand options trading on the LQDTY blockchain, it is essential to become familiar with the core terminology:

• Premium: The upfront cost that the buyer of the option pays to the seller for acquiring
  the rights associated with the contract. On LQDTY, this is a transparent, blockchainrecorded transaction.

• Strike Price: The price at which the underlying asset can be bought (call option) or
  sold (put option). This is predetermined and forms the basis of the trade.

• Expiration Date: The date by which the buyer must exercise their right or let the
  option expire. On LQDTY, this information is immutably recorded on the blockchain for transparency.

• Call Option: A type of contract that allows the buyer to purchase the underlying asset
  at the strike price within the contract period.

• Put Option: A type of contract that allows the buyer to sell the underlying asset at the
  strike price within the contract period.

3.11.3 Mechanics of Options Trading

The process of trading options on the LQDTY platform is streamlined to provide a seamless experience while leveraging blockchain's transparency and security.

• Options Issuance and Listing: Smart contracts automatically create and list options contracts based on user demand. These contracts detail key parameters such as the underlying asset, strike price, premium, and expiration date.

• Buying and Selling Options: Buyers can select options based on their trading strategies and pay the associated premium to acquire the rights to the contract. Sellers, in turn, receive the premium as compensation for assuming the trade risk.

• Exercise or Expiration: Buyers may choose to exercise their options if the market conditions are favorable (e.g., the market price surpasses the strike price for a call option). If the buyer does not exercise the option by the expiration date, it becomes void, and the seller retains the premium.

• Blockchain Integration: Every step of the process, from issuance to settlement, is recorded on the blockchain, ensuring transparency and security. Using smart contracts eliminates the need for intermediaries, reducing transaction costs and delays.

3.11.4 Advantages and Risks

Options trading on LQDTY offers numerous advantages while requiring traders to remain mindful of potential risks.

• Advantages:
  1. Controlled Risk Exposure: Buyers risk only the premium paid, while sellers have the opportunity to earn consistent premiums for taking on calculated risk.
  2. Portfolio Diversification: Options allow traders to hedge their positions, protecting against unfavorable price movements. For example, purchasing a put option can offset potential portfolio losses during a market downturn.
  3. High Flexibility: The ability to choose between call and put options, customize strike prices, and select expiration dates provides traders with unparalleled control over their strategies.
  4. Decentralized Trading: On LQDTY, options trading is conducted in a trustless, decentralized environment, reducing counterparty risk and ensuring transparency.
  
  
• Risks:
  1. Limited Time Horizon: Options have an expiration date, meaning they can lose all their value if not exercised within the contract period.
  2. Complexity for Beginners: SUnderstanding how options work and effectively deploying them in trading strategies can be challenging for novice traders.
  3. High Risk for Sellers: While buyers only risk the premium, sellers face potentially unlimited losses in scenarios where market conditions swing dramatically against their position.