Options on Bitsy Services Wiki

Option Type

Mon, 01 Jan 0001 00:00:00 +0000

Option type is the most basic classification of an options contract: it is either a call option or a put option. Every other property of an option – strike price, expiry, the Greeks – builds on top of this distinction.

Call vs. Put#

A call gives the holder the right to buy the underlying asset at the strike price. A put gives the holder the right to sell at the strike price. Neither obligates the holder to act – the option can always expire unused, with the holder’s loss limited to the premium paid.

Call Option

Mon, 01 Jan 0001 00:00:00 +0000

A call option is a contract that gives the holder the right – but not the obligation – to buy a specified quantity of an underlying asset at a predetermined strike price before a given expiration date. If the asset’s market price exceeds the strike at expiry, the holder profits; if not, the option expires worthless and the holder loses only the premium paid.

Key components#

Underlying asset – the token or asset the option references (e.g. ETH, BTC).
Strike price – the price at which the holder can buy.
Premium – the upfront cost the buyer pays for the contract. This is the buyer’s maximum possible loss.
Expiration date – the deadline to exercise. After this the contract is void.

Moneyness#

A call option’s relationship to the current spot price determines its moneyness:

Put Option

Mon, 01 Jan 0001 00:00:00 +0000

A put option is a contract that gives the holder the right – but not the obligation – to sell a specified quantity of an underlying asset at a predetermined strike price before a given expiration date. Puts profit when the underlying asset’s price falls below the strike, making them the primary instrument for bearish bets and downside hedging.

Key components#

Underlying asset – the token or asset the option references.
Strike price – the price at which the holder can sell.
Premium – the upfront cost paid by the buyer. This is the buyer’s maximum possible loss.
Expiration date – the deadline to exercise.

Moneyness#

State	Condition	Intrinsic value
In-the-money (ITM)	Spot < Strike	Positive
At-the-money (ATM)	Spot ≈ Strike	Zero
Out-of-the-money (OTM)	Spot > Strike	Zero

Note that moneyness for puts is the mirror of call options – a put is ITM when the spot price is below the strike.

Strike Price

Mon, 01 Jan 0001 00:00:00 +0000

The strike price (also called the exercise price) is the fixed price at which an option holder can buy or sell the underlying asset. For a call option the strike is the purchase price; for a put option the strike is the sale price. It is the single most important parameter when selecting an options contract because it determines moneyness, intrinsic value, and the risk/reward profile of the trade.

Moneyness#

The relationship between the strike price and the current spot price defines an option’s moneyness:

Implied Volatility

Mon, 01 Jan 0001 00:00:00 +0000

Implied volatility (IV) is the market’s forecast of how much an asset’s price will fluctuate over the life of an option. It is extracted from the option’s current market price – given all the other known inputs (spot price, strike price, time to expiry, risk-free rate), IV is the volatility value that makes the theoretical price match the observed price.

Higher IV means options are more expensive because the market expects larger price swings. Lower IV means options are cheaper.

Option Greeks

Mon, 01 Jan 0001 00:00:00 +0000

The option greeks are a set of sensitivity measures that describe how an option’s price responds to changes in underlying variables – spot price, time, volatility, and interest rates. They are the primary tools for understanding and managing risk in options positions.

Summary#

Greek	Symbol	Measures sensitivity to	Typical range (calls)	Typical range (puts)
Delta	Δ	Underlying price	0 to +1	-1 to 0
Gamma	Γ	Rate of change of delta	Always positive	Always positive
Theta	Θ	Time (passage of days)	Usually negative	Usually negative
Vega	ν	Implied volatility	Always positive	Always positive
Rho	ρ	Interest rates	Positive (calls)	Negative (puts)

Delta (Δ)#

Delta measures how much an option’s price changes for a $1 move in the underlying.

Option Spread

Mon, 01 Jan 0001 00:00:00 +0000

An option spread is a strategy that combines buying and selling multiple options on the same underlying asset, with different strike prices, expiration dates, or both. By pairing a long option with a short option, the trader caps both risk and reward – the short leg offsets part of the long leg’s cost, while the long leg limits the short leg’s downside.

Spreads are the workhorse of structured options trading. Naked options expose the seller to unlimited (or near-unlimited) loss; spreads bound that loss to a known maximum, making them practical for both retail traders and on-chain protocols that need to collateralize positions.

Vertical Spread

Mon, 01 Jan 0001 00:00:00 +0000

A vertical spread is an option spread built from two options of the same type – both calls or both puts – with the same expiration date but different strike prices. The name comes from the options chain layout, where strike prices are listed vertically.

Verticals are the simplest multi-leg options strategy. Both maximum profit and maximum loss are known at entry, making them popular with traders who want defined-risk directional exposure.

The four verticals#

There are exactly four vertical spreads, defined by option type and whether the position is net long or net short:

Perpetual Option

Mon, 01 Jan 0001 00:00:00 +0000

A perpetual option is an options contract with no expiration date. The holder retains the right to exercise indefinitely, which eliminates the need to roll positions from one expiry to the next. The tradeoff is a recurring funding payment that replaces the time-decay (theta) mechanism of standard options.

How Funding Replaces Theta#

In a conventional option, the passage of time erodes the option’s value – this is theta decay, one of the option Greeks. The seller captures this decay as compensation for bearing risk. A perpetual option has no expiry, so there is no natural theta. Instead, the protocol charges the option holder a periodic funding fee, paid to the seller (or liquidity pool). This fee is analogous to the premium drip that a standard option seller earns through time decay.

Emulating Option Strategies in DeFi

Mon, 01 Jan 0001 00:00:00 +0000

Traditional option strategies – spreads, condors, butterflies – can be approximated using DeFi primitives even on protocols that do not offer a native options order book. Concentrated liquidity-pool positions, perpetual options, structured vaults, and on-chain binary payoffs can all replicate familiar payoff curves, with trade-offs in precision, cost, and path dependency.

This page bridges the options cluster (call options, put options, spreads, verticals) with the AMM and LP pages.

Concentrated LP Positions as Synthetic Options#

A concentrated LP position in a constant-product AMM (such as Uniswap v3) behaves like a short option. The LP collects fees (analogous to premium) in exchange for bearing directional risk if the price moves outside the range:

Risk-Defined Strategy

Mon, 01 Jan 0001 00:00:00 +0000

A risk-defined strategy is any position where the maximum possible loss is known before the trade is entered. The trader accepts a capped upside in exchange for a hard floor on downside. In traditional finance this usually means option spreads; in DeFi it extends to collateralized vault positions, bounded liquidity-pool ranges, and on-chain binary payoffs enforced by smart contracts.

Why It Matters#

Undefined-risk positions – selling a naked call, providing unbounded liquidity, writing uncollateralized contracts – can produce losses that exceed the original capital. Risk-defined strategies cap that exposure, which makes them:

Bear Bet

Mon, 01 Jan 0001 00:00:00 +0000

A bear bet is a tokenized, on-chain derivative that packages a bear put spread into a single mintable asset. Rather than manually buying and selling put options at different strike prices, the bear bet wraps both legs into one smart contract interaction – producing a tradeable token that represents the entire position.

Bear bets are a risk-defined strategy: both the maximum gain and maximum loss are known at the time of purchase.

Structure#

A bear bet is economically equivalent to a bear put spread – a vertical spread constructed from two put options:

Bull Bet

Mon, 01 Jan 0001 00:00:00 +0000

A bull bet is a tokenized, on-chain derivative that packages a bull call spread into a single mintable asset. Instead of separately buying and selling call options at different strike prices, the bull bet wraps both legs into one smart contract interaction – producing a tradeable token that represents the entire position.

Bull bets are a risk-defined strategy: both the maximum gain and maximum loss are known at the time of purchase.

Structure#

A bull bet is economically equivalent to a bull call spread – a vertical spread constructed from two call options:

Bear Call Spread

Mon, 01 Jan 0001 00:00:00 +0000

A bear call spread is a vertical spread that profits when the underlying asset stays flat or declines. It is constructed by selling a call option at a lower strike price and buying a call at a higher strike, both with the same expiration. The trade produces a net credit – the premium collected from the sold call exceeds the premium paid for the bought call.

This is a risk-defined strategy with capped profit and capped loss, making it popular for generating income in neutral-to-bearish conditions.

Bear Put Spread

Mon, 01 Jan 0001 00:00:00 +0000

A bear put spread is a vertical spread that profits when the underlying asset declines. It is constructed by buying a put option at a higher strike price and selling a put at a lower strike, both with the same expiration. The trade costs a net debit – the premium paid for the higher-strike put exceeds the premium collected from the lower-strike put.

This is a risk-defined strategy with capped profit and capped loss, suited to traders with a moderately bearish outlook who want to reduce the cost of buying a put outright.

Bull Call Spread

Mon, 01 Jan 0001 00:00:00 +0000

A bull call spread is a vertical spread that profits when the underlying asset rises. It is constructed by buying a call option at a lower strike price and selling a call at a higher strike, both with the same expiration. The trade costs a net debit – the premium paid for the lower-strike call exceeds the premium collected from the higher-strike call.

This is a risk-defined strategy with capped profit and capped loss, suited to traders with a moderately bullish outlook who want to reduce the cost of buying a call outright.

Bull Put Spread

Mon, 01 Jan 0001 00:00:00 +0000

A bull put spread is a vertical spread that profits when the underlying asset stays flat or rises. It is constructed by selling a put option at a higher strike price and buying a put at a lower strike, both with the same expiration. The trade produces a net credit – the premium collected from the sold put exceeds the premium paid for the bought put.

This is a risk-defined strategy with capped profit and capped loss, making it popular for generating income in neutral-to-bullish conditions.

Cash-Backed Synthetic Option

Mon, 01 Jan 0001 00:00:00 +0000

A cash-backed synthetic option (CBSO) is a fully collateralized, on-chain derivative that replicates the payoff of a traditional option spread without requiring an actual underlying asset to change hands. The “cash-backed” part means every position is backed one-to-one by a settlement currency locked in a smart contract – there are no margin calls and no liquidation risk. The “synthetic” part means the contract derives its value from an external price feed rather than from custody of the underlying asset.

Cash-Backed Synthetic Options Design

Mon, 01 Jan 0001 00:00:00 +0000

This page describes the smart contract architecture behind Cash-Backed Synthetic Options (CBSOs). The system is composed of four primary contracts – Option, Option Factory, Option Settler, and Fee Box – plus an external Asset Price Oracle.

Option Contract#

The Option contract is the core unit. Each instance represents a single CBSO with specific parameters:

Property	Description
Asset Price Oracle	The oracle providing price data for the underlying asset
Option Type	Put or call
Stake	The collateral amount backing the option
Strike Price	The price at which the option settles
Expiry	The expiration timestamp
Fee Box	The contract that receives collateralization fees after settlement

Each Option is an ERC-20 token, making it transferable and tradeable on any DEX.

Innovative Claims of CBSOs

Mon, 01 Jan 0001 00:00:00 +0000

Cash-backed synthetic options combine several properties that, taken together, distinguish them from both traditional options and existing DeFi derivatives. This page catalogs the novel design claims of the CBSO system – useful for understanding what makes the architecture distinctive and where it advances the state of the art.

Core Innovations#

Dual Volatility Management#

Traditional options assume a stable settlement currency (USD) and a volatile underlying asset. CBSOs allow the settlement currency itself to be volatile (e.g., ETH), enabling hedging against both asset price movement and settlement-currency risk simultaneously. This is not possible in conventional options markets.