01’s Everlasting Options
[Chinese version here]
01 is incredibly excited to be one of the first protocols to officially launch an entirely new type of DeFi-native derivative product: everlasting options. Everlastings are options that never expire (∞) and that constantly readjusts its strike price so that traders can be exposed to options without the need to select a strike, select an expiry time, or manually roll over their funds at expiry.
Everlastings were first introduced by Dave White and Sam Bankman-Fried in their whitepaper here. We highly recommend reading it as it explains everlastings quite well.
This article tries to cover as much as possible in a digestible manner. If anything is unclear or requires additional explanation, do reach out to us @01_protocol or in our discord. Feedback is rewarded with our everlasting love and appreciation!
☝️ Traditional Options
An option is a type of derivative contract where one party has the option to buy (call) or sell (put) a number of some underlying asset to another party at a given price at a given time. The given price is referred to as the strike price, and the given time as the expiry. The price to purchase the contract is the premium. The two parties are referred to as the longer and the shorter. The longer is the buyer of the contract, while the shorter is the seller. So buying a “sell option” would be referred to as longing a short. Let this terminology sink in.
Options can be settled in different ways. A physically settled option will see the party actually trade the underlying asset at settlement, while a cash settled option transacts in the final underlying asset prices, without actually exchanging the underlying asset itself. We are mostly interested in cash settled.
At expiry, a few scenarios can occur. Let’s take someone who bought a call option (long call). If the underlying asset is above the strike price, they would be making a profit, since they can now exercise their option by buying the underlying asset at the strike price and reselling it at the higher actual price. Interestingly, if the underlying is below the strike price (strike price + premium to be exact), then the trader only loses up to the premium they paid for the contract initially and no more than that, since they have the option to not exercise the option, meaning they only lose how much they paid for. This return curve means there is a capped downside and theoretical uncapped upside (this is only for a long call, the return curve is the opposite for a shorter, capped upside and uncapped downside).
The trader of the option needs to first select an expiry date, then a strike price, and finally find a price for their contract that makes sense for their strategy, which is often hard to do given how liquidity is fragmented across all the different markets. Moreover, if they wish to have long term exposure, they will need to roll over their position by opening new positions after their old ones expire. This exposes traders to high spreads (difference between the bid and ask price) and can quickly become quite expensive.
If this sounds inefficient, you’re not alone. Everlastings seek to consolidate a lot of the complexity into an efficient DeFi-friendly option vehicle.
📈 Futures and Perpetuals
Futures are similar to options in a few ways. A futures contract is also made between one party who agrees to buy a number of some underlying asset to another party at a given price and given time, except now the buyer has the obligation to buy. Futures also traditionally have expiry dates.
Perpetuals were introduced as a futures contract without expiry through a unique funding mechanism.
To simulate “rolling over your position” in futures, a funding fee of
funding fee = (mark price — index price) is paid from longers to shorters.
Perpetuals have since made futures contracts incredibly intuitive to trade in DeFi.
Paradigm has also released a very useful perpetuals guide here. We highly recommend understanding how perpetuals work.
💫 Introducing: Everlastings
If you see where this is going, you’ll start to notice that everlastings are in a way the “perpetual” for options.
Perpetuals brought key innovations to futures by consolidating all the expiry dates into a single packaged asset, and abstracting away the necessity to manually roll-over positions for long term exposure.
Everlastings do the same for options.
So how does it work?
A single everlasting option represents a long term bet on an underlying asset and has no expiry, and a single floating strike. This means that for a given market (ex: BTC-USD), there will only be 2-3 possible markets: a call everlasting, a put everlasting, and potentially also a move everlasting (combination of call and put, where the payout is an absolute value on the index and strike difference). This is vastly different from traditional option markets, where you will notice that there are 10–20 different markets split between various expiries and strikes.
The floating strike price is an exponentially weighted moving average of the underlying asset’s price over time, allowing the everlasting to consolidate all strikes, and retain its “everlasting” features. The floating strike should also satisfy the vast majority of strike needs.
Finally, to replace and simulate the idea of “rolling over your position”, the everlasting also uses a funding mechanism but with a different funding rate. Longers pay shorters a daily funding fee of
funding fee = (mark price — payoff) where
CallPayoff = max(0,(index — strike)) for calls, and
PutPayoff = max(0, strike — index). The index price is the current price of the underlying asset.
Why does this make sense?
Imagine if you wanted to hold a long term position in a certain option. When it comes time to “roll over” your position at the end of the day, you will first close your current position, then open your next position. By closing your current position, you are effectively receiving some amount of payout (which could be 0 if the option expires worthless). Then by opening a new position, you are effectively paying the mark price (aka the current price/ premium of the option). This sums up beautifully to the funding rate of mark minus payout.
Moreover, because you would be doubling your position the instant before expiry, you can think of it as for a given day, you hold exactly half a position, 1/2 in the position you are about to close, and 1/2 in the one that you will open.
Extending this logic, an equivalent portfolio for regular expiring options would be comprised of 1/2 of the contracts expiring by whenever your first funding payment would be, 1/4 by the next funding payment, 1/8 by the next next funding payment, and so on and so forth, summing up to 1.
Why trade everlastings?
For many different reasons. Everlastings can be uniquely used for long term hedging, traded for leveraged upside, or composed with unique strategies (like married puts, covered calls, and many more).
Moreover, the simplicity and automated nature of it, makes it a much more DeFi friendly tool, enabling frictionless and powerful long term exposure to options, without the need to worry about strikes, expiries, and expensive roll-overs.
- Traditional options require selecting across different strikes and expiries
- Rolling over regular expiring options can be expensive due to liquidity being fragment across markets, among other reasons
- Everlastings simplify the process of gaining long term exposure to options, by consolidating across all expiries using a funding mechanism, and across all strikes using a floating strike price.
- The funding mechanism is
funding = mark — payout
- Everlastings promise to bring the power, efficiency and intuitive-ness of perpetuals to the world of DeFi options
We hope we didn’t overwhelm you with too much information. If you have any comments, feedback, questions, or want to point out any mistakes we may have made, we’d love to hear it! And if this sounds like something you would love to work/ jam with us on, please reach out to us @01_protocol or come find us in our discord!
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(Disclaimer: none of this is financial advice)