How does it work?

<aside> 📚 For further details, check our documentation.

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Pods Protocol was built on top of two core components: the Options Instrument and the Options AMM.

The Options Instrument only defines the functions that will impact the creation of an option (with certain characteristics), the collateral and its exercise. It has the function of mint, unmint, exercise and withdraw both calls and puts. The implementation requires the options to be fully collateralized. The options can be European and have a physical settlement, leaving no liquidation systems exposure.

Anyone can create new options series at any time.

Pricing and trading options tokens happen in the options AMM. For that to happen, the Options AMM:

Enables single-sided liquidity provision.
Algorithmically prices the options using Black Scholes.
Update factors such as time to maturity and spot price.
Programmatically updates the Implied Volatility change over time based on the conditions of the pool. For more details, check Pricing.

An option seller can lock collateral in an options contract, sell it to the options AMM for the current premium. An option buyer can buy the options tokens directly on the AMM, paying the current premium.

Users that seek liquidity provision methods can provide liquidity to the options pools with options tokens and/or stablecoins.

High level example

Consider a put option for WBTC:USDC, strike price 7000, premium 3 DAI, expiration date May 30.

A put option for WBTC:USDC represents the right but not the buyer's obligation to sell WBTC at strike price during the expiration window.

The notation WBTC:USDC means that WBTC is the underlying asset and USDC is the strike asset. Since this is a put option on WBTC price, the collateral will be held in USDC.

The seller locks collateral in the contract, mints options tokens, and sells them in the Options AMM at the current price. Our current pricing model follows an adaptation of the Black-Scholes formula for pricing European options. For more details, see the protocol docs.