Guide: Minting Options with Pods
Create new option tokens and sell them for a premium or add them as liquidity to the pools
Understanding the concept
Let’s start with a fundamental question:
What does minting an option mean?
Often referred to as writing an option in traditional finance, minting an option refers to creating a new option token. It means to lock collateral into a contract that contains all the details of an option contract. The collateral and contract details such as the strike price, underlying asset, collateral asset, and expiration merge into one ERC20.
More specifically, the process of minting an option happens inside the Options Instrument. We often understand the Options Instrument as a factory of options tokens. To make the engines work, you do need to pump in energy, which, in our case, is the collateral. Once you locked collateral in the contract, the contract will issue options tokens and send them to your wallet. The amount of options tokens follow a 1:1 proportion with the underlying asset. So the total of options tokens is correlated with the amount of underlying asset at the strike price.
Why do we 100% collateralization ratio when minting a new option?
At this point, Pods requires full collateralization so it can allow for physical settlement in a decentralized way.
One upside is that requiring a 100% collateralization ratio also means that options creators are delta hedged since it doesn’t matter the changes in the underlying asset; they will hold the total margin for a potential exercise.
Let’s analyze the following example:
Trevor wants exposure to an ETH:USDC put option, a strike price of 2000 USDC, and expiration on May 1st, 2021.
He’ll have to start by creating the options:
Lock collateral for two option tokens, which in this case will be: 2 * 2000 = 4000 USDC in the Options Instrument contract and mint (or create) two options tokens.
Trevor will see the options tokens as ERC20 in his wallet address. But does solely minting and holding the option token in your wallet translate into instant exposure? No.
When minting an option, there are three possibilities:
- You can sell the options for a premium and immediate total exposure.
- Provide the option tokens as liquidity to the AMM and be exposed to the AMM returns and trading fees.
- Do nothing and just hold the option tokens in your wallet (not recommended since it doesn’t do anything).
What is the difference between minting and buying an option if, in both cases, I can see options tokens in my wallet?
They are not the same thing. Having collateral locked in an option token is different than buying an option token and holding it in your wallet because the things you can do with it are different. And the consequences too.
In the case of a put option, a user that mints an option has to lock collateral asset (USDC) to get exposure to maybe buying the underlying asset (ETH) at the strike price.
On the other hand, a user that buys an option token is paying for the optionality of selling the underlying asset (ETH) at the strike price. In this case, the option token represents protection to the buyer.
The following diagram explains the scenario where the option minter (or creator) sells the options in the AMM, and a buyer buys options from the AMM. Notice the different outcomes of the two flows.
We explained this concept in the video below.
Minting a put option in the app
Currently, when users want to sell options straight to the AMM, the minting process is bundled into the transaction, so users don’t have to approve the transaction twice.
However, if you want to provide options as liquidity to the AMM, you need to mint options separately. Find next the instructions to mint an option.
Find the mint page according to the gif below.
Once there, input the amount of collateral will be locked and exposed to being exercised.
Also notice the summary with information of the transaction above the confirmation button.
Once you finished reviewing the summary, it's time to “Allow” the token. After that the “Mint Options” button will change color.
Your position will be updated in the Position card on the right in “Available for providing” to the pool.
As we mentioned before, minting an option only makes sense if you are going to provide options tokens as liquidity or if you intend to sell the options to the AMM for a premium.
We did a demo of minting options in the video below.
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Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
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