Exercising & Settlement
Premia uses a hybrid cash settlement mechanism to minimize the amount of funds that need to change hands. All Premia options are fully collateralized at all times
When a user buys an option, they can exercise their option at any time after purchase. Options can be exercised in full or in partial amounts over time. If at the time of maturity, an option is In The Money, the payoff is locked in and can be claimed at any time post maturity by the owner of the option. There is no penalty for late exercising.
Exercising and settlement of a PUT option
Put options rise in value as the underlying tokens drops in value.
If at the time of exercise, the price of the underlying asset is lower than the breakeven price, the put option is considered In The Money. In this case, the user is entitled to the payoff, which is equal to the strike price of the underlying minus the spot price. This difference is calculated automatically and settled in cash (the base token) to the option buyer.
Example: A user buys a 2 ETH/DAI put option, at a strike price of 3,000 DAI. At the time of exercise, the ETH price is 2,700 DAI. The user receives the difference between the strike price and the spot price (3,000 - 2,700), multiplied by the amount of options they own (2). In this case, the user receives 600 DAI on exercise.
Exercising and settlement of a CALL option
Call options rise in value as the underlying token price rises in value.
If at the time of exercise, the price of the underlying asset is higher than the breakeven price, the call option is considered In The Money. In this case, the user is entitled to the payoff, which is equal to the strike price of the underlying minus the spot price. This difference is calculated automatically and settled in the underlying asset (the quote token) to the option buyer.
Example: A user buys a 2 ETH/DAI call option, at a strike price of 3,500 DAI. At the time of exercise, the ETH price is 4,000 DAI. User receives the difference between the strike price and the spot price (4,000 - 3,500), multiplied by the amount of options they own (2). In this case, the user is entitled to 1,000 DAI, which is settled in ETH. Thus the user receives (1,000/4,000 ETH) = 0.25 ETH on exercise.
NOTE: Currently options can only be exercised back to the pool. In the near future, we will also enable selling options back to the pool.
Last modified 1yr ago