The mechanism

Put options on NFT collections

• At the protocol level, what we are creating is a peer to peer platform to trade American put options on a NFT collection.

• An American put option is a contract between 2 counterparts. The option buyer (the Seller of the NFT) has the right to sell to the option writer (the Buyer of the NFT) an asset (any NFT from the collection) for a predetermined price (the Strike, which is the sum of the Security Deposit and the Settlement Price), anytime before its expiry (Settlement Deadline). In order to obtain this right, the option buyer will pay a premium (the Security Deposit) to the option seller.

• The options we trade on BullvBear are physically settled.

  • In most option trading, in crypto or in TradFi, options are cash settled. This means that the option buyer does not actually need to sell any asset to the option writer, but instead, the option writer will pay him a cash amount equal to the difference between the Strike and the asset price.

  • There are however a few options that are indeed physically settled in TradFi, like oil futures (WTI) in the US. If you actually hold a WTI future to expiry, you will actually have to collect a delivery of oil in Cushing, Oklahoma.

  • In our case, this means that in order to exercise his option, the Seller will have to sell any NFT from the collection into the contract for the predefined Strike.

  • This allows us in particular to avoid using an oracle on floor prices data feed.

• The options are fully collateralized. This means that, in the contract, the Seller will buy the option by bringing the premium, the Security Deposit in our interface, and the Bull will collateralize the option by bringing (Strike-premium), the Settlement Price. So the amount of ETH in the contract will be equal to the Strike, ensuring the Seller will indeed be able to sell the NFT for this Strike.

• However, no NFT needs to be collateralized in this mechanism. A NFT is only used for the exercise of the option at the end, and can be purchased right before, even in an atomic transaction.

• Payoffs can be described graphically like this :

Example

• A few examples taking real numbers, with a collection with a starting floor at 5 ETH, a Settlement Price at 4 ETH and a Security Deposit at 3 ETH.

Example 1

• When the floor falls at 3 ETH, the Seller has the incentive to actually purchase the cheapest NFT he can find from the collection, so most probably a floor NFT, and sell it to the contract for 7 ETH, generating a 4 ETH profit. As he initially paid 3 ETH to open the trade, he made a 1 ETH profit. The Buyer received the NFT, which is now worth 3 ETH. He therefore had an overall loss of 1 ETH.

• If the floor price went even lower, the Seller would make a larger profit. This is why this mechanism is a good way to short a NFT collection floor price.

Example 2

• If the floor price went up to 6 ETH, the Seller still has the incentive to purchase a floor NFT at 6 ETH and sell it immediately for 7 ETH, generating a 1 ETH profit. However, on the overall trade, he will actually have lost 2 ETH. The Buyer will receive a 6 ETH NFT for a 4 ETH investment, making a 2 ETH profit.

• The option is a zero sum game, what the Buyer earns, the Seller loses, and vice versa.

Example 3

• However, if the floor price goes above 7 ETH, let's say to 8 ETH, the Seller does not have any reason to purchase a 8 ETH NFT and sell it for 7 ETH. He will therefore default on the option and the Buyer will receive the 7 ETH instead of the NFT.