How Can an Option Contract Be Structured and Executed Using a Smart Contract?
The smart contract code defines the option's parameters: the underlying asset, strike price, expiration date, and premium. The contract is deployed with the premium locked by the buyer.
Upon the expiration date, an Oracle feeds the current market price of the underlying asset to the contract. The smart contract automatically compares the market price to the strike price and executes the "in-the-money" action, transferring the underlying asset or cash to the option holder, or expires worthless.
Glossar
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Strike Price
Reference ⎊ The Strike Price is the predetermined reference level set at the contract's inception against which the underlying crypto asset's spot price is compared at expiration or exercise.
Early Exercise Feature
Feature ⎊ The Early Exercise Feature is the defining characteristic of American style options, permitting the holder to execute their contractual right to buy or sell the underlying asset before the official expiration date.
Option Contract
Derivative Foundation ⎊ An Option Contract is a formalized agreement granting the holder the right, but not the obligation, to buy or sell an underlying asset, such as a cryptocurrency, at a predetermined price on or before a specified future date.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.