Skip to content

Trading

This section presents concepts on how the Volorca Protocol may be used to take positions on option instruments.

Pricing Positions

LONG and SHORT position tokens are minted 1:1 with currency tokens. This normalizes the best case payout for either position to 1 currency token.

In other words, in the best case for LONGs, if the instrument is Liquidated, each LONG position token is entitled to redeem 1 currency token.

In the best case for SHORTs, if the instrument is settled OTM, each SHORT position token is entitled to redeem 1 currency token.

Entering LONG Positions

Liquid Market

If there is enough liquidity in the market, users can buy LONG position tokens directly from the market.

Illiquid Market

If users want to place an order to buy LONG position tokens of an uncreated instrument, they can first create the instrument (by performing a mint of 0 position tokens) to obtain the address of the LONG position token, then place the buy order on the market.

Minting

Users can also mint LONG and SHORT position tokens from the instrument contract, then sell the SHORT position tokens on the market and ultimately hold LONG position tokens.

As a simplified example, taking $ as the currency token, the user can deposit $100 to the instrument contract, minting 100 LONG and 100 SHORT position tokens in the process. The user can then sell each SHORT position token for $1 minus what the user thinks is a fair premium for each LONG token. Assuming the user thinks a fair premium is $0.02, the user can sell each SHORT position token for $0.98. If successful at selling all 100 SHORT position tokens, the user will have effectively purchased 100 LONG positions at $0.02 each.

Exiting LONG Positions

  • Sell LONG position tokens on the market.
  • Buy an equal amount of SHORT position tokens from the market, then perform a Withdrawal.

Entering SHORT Positions

Liquid Market

If there is enough liquidity in the market, users can buy SHORT position tokens directly from the market.

Illiquid Market

If users want to place an order to buy SHORT position tokens of an uncreated instrument, they can first create the instrument (by performing a Mint of 0 position tokens) to obtain the address of the SHORT position token, then place the buy order on the market.

Minting

Users can also mint LONG and SHORT position tokens from the instrument contract, then sell the LONG position tokens on the market and ultimately holding SHORT position tokens.

Exiting SHORT Positions

  • Sell SHORT position tokens on the market.
  • Buy an equal amount of LONG position tokens from the market, then perform a Withdrawal.

Switching Over to Another Instrument

In some cases, SHORT holders, for example, may want to switch over to a threshold price further away from the current price to lower their chances of getting liquidated.

To do this, they would have to exit their current SHORT position and enter a new SHORT position on a separate instrument that has a further away threshold price.

The same applies to LONG holders.

In general, switching over from one instrument to another will require exiting the current position and then entering a new position on the different instrument.

Fees

If fees are active, those should be taken into account when pricing position tokens.

The above descriptions assume 0 fees.