💡CEPOs

vDEX is the first DEX offering to trade constant expiry perpetual options (CEPOs). When trading traditional options, the expiry date and strike price are known at execution time and remain fixed for the life of the trade. CEPOs, on the other hand, have a continuously rolling expiry instead of a fixed one. This feature renders the option perpetual and gives traders the opportunity to keep their exposure for as long as they want. Profits and losses are computed and settled on a live basis, at which point there is an implicit and continuous rebalancing in traders’ positions and sizes.

Let’s illustrate this with a simple example:

• Let’s assume a trader A who buys a one-month expiry ATM call option on BTC, with BTC trading at 65,000 USDT (ATM means “At the money”, i.e. strike price = 65,000 USDT). Let’s also suppose that for the whole month, the price of BTC has swung a lot but at the expiry date, BTC comes back to that 65,000 USDT level. The call option expires worthless and trader A would have then lost all the premium paid upfront for this option.

• On the other side, trader B buys a one-month ATM CEPO call (he does not pay anything upfront but needs to post margin). After one month, BTC still trades at 65,000 (same as for trader A) but in this case, trader B still holds a one-month CEPO call as if his position had been continuously rolling into new ATM one-month call options.

• Of course, trader B at that point will not hold as much call options as he initially did because of the continuous theta (time value) losses on his options, but he still holds a one-month call option (losing theta every day on a month option is not as bad as losing theta for 30 days on a traditional option as theta accelerates when time to expiry gets very small) with high volatility given the swings on that month. If the next day BTC moves up by 25% it is very likely that he will recoup a lot (if not all) of the negative unrealized PnL.

• Trader’s A was also right in his view that BTC would go up after one month, but his forecast was wrong by one day and he lost all his money.

Perpetual options give traders the chance to be slightly wrong in their timing: if they had expected a big move to happen over a certain period of time but the move does materialise only slightly after, they could still benefit overall.

Another benefit for traders is the liquidity this product will create. Because vDEX will only offer a few expiries to trade (1w, 2w, 1m, 3m and 6m) and with constant moneyness, traders will always hold the same liquid options that everyone else is trading at any given time, with the obvious impact of tightening bid/ask spreads considerably. Traders will not be trapped into odd expiry/strike structures that no one else wants to trade nor quote (at reasonable prices at least) in the future.

Transparency will also be improved as the main quantity everyone will be looking at is the ATM volatility term structure. This is an elegant way of avoiding the smile surface conundrum for the benefit of all: liquidity and opacity issues as well as difficulty for market makers to maintain smiles are all eliminated at once.

This product provides great advantages for long, delta hedged positions (with gamma always at the highest), hence providing a fantastic hedge against big moves in the prices of the underlying assets.