Opyn Partial Collateralization Launch

Published on: 30.06.2021

Opyn is launching the first-ever on-chain margining system for partially collateralized options.

To date, one of the biggest limitations of options in decentralized finance was that users were required to fully collateralize options trades. In traditional finance, margin required for options only represents a small fraction of the total value of the contract, making options a highly leveraged trading vehicle. Trading on margin is also why traditional financial markets have been more capital efficient than DeFi but today marks the dawn of a new era!

In other words, partially collateralized options represent a large contract value that can be controlled with a relatively small amount of capital. This aspect of options trading results in greater profits and losses than fully-collateralized options, providing traders, and ultimately markets, with better leverage and capital efficiency.

🔹Opyn Partial Collateralization Overview

Users can now choose if they want to fully collateralize or partially collateralize a minted option.

If a user chooses to partially collateralize their trade:

For calls, less than 1 underlying asset can be posted as collateral
For puts, less than strike can be posted as collateral

With partial collateralization, excess capital is now free to either standby risk free or be deployed in another trade.

*There is a minimum size required for partially collateralized positions. The current minimums are 1 ETH for selling call options and 2500 USDC for selling put options.

Benefits of Partial Collateralization

Enhanced leverage for short options
Sell MORE options to generate HIGHER yield
Commit less capital, allowing more portfolio flexibility

Risks Associated with Partial Collateralization

Greater downside leverage
Under-collateralized positions will lead to forced liquidations
Possible to lose 100% of original investment prior to expiration

🔹Margin Design

Margin is calculated using only a spot price, a shock to spot parameter, a conservative assumption on vol/premium, and time to expiry to give a worst case bound on the option premium.

Full details here.

🔹Liquidation Mechanism

Sellers must maintain a minimum amount of collateral in their vault to secure the options they have sold. If a seller fails to do so, their vault may be liquidated and their collateral will be seized and auctioned off to repay their debts. The liquidation mechanism is a reverse dutch auction that is triggered via a Chainlink pricer with a specific timestamp.

The reverse dutch auction serves as the price discovery mechanism for Opyn liquidations.The reverse dutch auction starts at a low price and then the price increases over time — liquidators will execute the trade when it is profitable.

Full details here.

🔹How to Sell Partially Collateralized Options

Select the bid of your preferred strike price
Enter the position size in the order box
Toggle the partial collateralization button on to display the collateralization ratio, spot change %, and liquidation price
Adjust the collateralization ratio or spot change % to set the position’s collateralization level
For Call options, select the approve WETH Wrapper button, and confirm with MetaMask or your wallet provider. This step approves the Opyn platform to wrap your ETH, which will be used as collateral for the trade. For Put options, select the Approve Collateral button. This step allows the Opyn platform to approve your collateral for the trade.
Select the Issue oToken button, and confirm the transaction. This action issues your oTokens for the selected options series
Select Approve oToken button, and confirm the transaction . This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
Select the Sell oToken button, and confirm the transaction. This action sells your minted oToken on 0x