DOPEX introduced ODTE (ZERO DAY TO EXPIRY) OPTIONS). For option trading aficionados, there is no greater thrill than watching your asset teetering on the brink of your chosen strike price.
ODTE options are as the name suggests – they are simply options that expire on the day of purchase. This allows traders with extremely short time frames to trade in a cheap manner (remember that the premium for an option is heavily influenced by time to expiration).
Decentralized 0dte options require decentralized solutions.
1. Providing liquidity for 0dtes
Similarly, to its SSOVs, LPs deposit $USDC to write put options or the base asset (e.g. $DPX or $ETH) to write call options.
LPers will not be required to select a strike price. Rather, liquidity will be provided in a range from 0-20% OTM. The exact strike price will be locked in when the option purchaser chooses to make their purchase. 20% is the current max OTM percentage variable but may be adjusted once governance is live.
For example, if the spot price is $1,500, calls may be purchased from $1,500 to $1,800 (1,500 * 1.2) whilst puts may be purchased from $1,500 to $1,200 (1,500/1.2). Premiums and settlements will be paid based on the weighted average strike price during each epoch.
Providing liquidity on 0dtes uses a pool-based system which means the options you write depends on how liquidity is utilized by buyers on a first-come-first-serve basis (earlier deposits will be utilized first). You will receive premiums from purchasers and may need to pay settlement if options expire ITM. The portion of liquidity that is unused will not receive premiums and also not be required to pay settlement.
0dtes use daily epochs which means settlement occurs at the same time every day with liquidity automatically rolling over into the next epoch. LP deposits have a withdrawal cooldown period of 1 epoch and can only be withdrawn during the next epoch.
2. Purchasing 0dtes
Purchasing 0dtes is slightly different to our standard SSOVs and requires two steps:
- Purchase (long) an 0dte at your selected strike price
- Sell (short) an 0dte at your selected strike price which is more OTM than your longed strike price (higher strike for calls and lower strike for puts)
- This creates a strategy known as an option spread
For traders, this means you will have a max payoff of [Short Strike – Long Strike] for calls and [Long Strike – Short Strike] for puts.
The rationale for this is three-fold:
- Short-term price action is not expected to be super volatile (buyers may choose further OTM short strikes if they want to capture more upside)
- Cheaper for buyers as premiums from short offset premium from long
- Loss on writer deposits is capped allowing for more efficient utilization of liquidity
Margin Safety Factor
When an 0dte option is purchased, a corresponding amount of liquidity from the LP pool will be locked based on:
- Liquidity from LP locked = Max Payoff Margin Safety Factor
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner.