Leverage Machine ($DMT)
Last updated
Last updated
Introduction to Options Trading
Options trading allows you to speculate on the future price movements of an asset without actually owning the asset. On the Leverage Machine dApp, you can trade options on the $DMT token using the $DMT/$WETH liquidity pool. This dApp is powered by the Stryke Concentrated Liquidity Automated Market Maker (CLAMM), which offers decentralized trading, meaning no central authority controls the market. Users can either provide liquidity to the market or purchase call and put options (also referred to as longs and shorts).
Call Options (Longs): A call option gives you the right to buy $DMT at a specific price (strike price) within a defined time frame. You profit when the price of $DMT goes above the strike price.
Put Options (Shorts): A put option gives you the right to sell $DMT at a specific price within a defined time frame. You profit when the price of $DMT falls below the strike price.
To understand options trading better, let’s use an analogy involving a fruit stand owner selling apples and oranges.
Options Trading Analogy: The Fruit Stand
Imagine you come across a fruit stand that sells apples and oranges. The fruit stand owner, Mr. Chad, tells you he will sell you apples for $1 each and oranges for $2 each. You believe that in the near future, the price of apples will increase due to a sudden surge in demand. You want to buy apples at today's price but don’t want to commit to buying them right now.
Here’s how you can use an option to secure the right to buy apples later:
Call Option (Right to Buy/Long): You make a deal with Mr.Chad and pay him a small fee (let's say $0.10 per apple) for the option to buy apples at $1 each anytime within a specific period, such as the next hour, day, or week. If the price of apples rises to $2 during that period, you can exercise your option, buy apples at $1 from Mr. Chad, and sell them at the market price, making a profit.
Put Option (Right to Sell/Short): Conversely, if you believe the price of oranges will fall, you can buy a put option. You pay Mr. Chad a small fee for the right to sell oranges to him at $2 each within a specific period. If the market price of oranges falls to $1 during that period, you can buy them at $1 from the market and sell them to Mr. Chad at $2, making a profit.
Profit Calculation for the Apple Sale
Let’s calculate the profit from buying a call option on apples using a simple mathematical equation:
Strike Price (K): The price at which you have the right to buy apples, which is $1.
Market Price (S): The actual price of apples in the market at the time you exercise the option, which is $2.
Premium (P): The cost of the option you paid to Mr. Fruitman, which is $0.10 per apple.
Number of Apples (N): The number of apples you have the right to buy.
In this example, exercising the call option would yield a profit of $9. This demonstrates how a call option can be profitable if the market price exceeds the strike price by more than the premium paid.
Now, let's relate this to trading options on the Leverage Machine dApp.
Accessing the Trade Page
Connect Your Wallet: First, open the Leverage Machine dApp and connect your Ethereum wallet (e.g., MetaMask). Make sure you have some $DMT and $WETH tokens in your wallet for trading.
Navigate to the Trade Page: Select the “Trade” option from the side menu to access the trade page. Here, you’ll see the $DMT/$WETH trading pairs available for options trading.
Trade Page Features Summarized
Token Pair Chart: At the bottom of the trade page, you’ll find a token pair chart powered by TradingView. This chart displays the price movement of $DMT relative to $WETH, helping you analyze market trends.
Call and Put Strike Prices: Above the chart, you’ll see a list of available call and put options with different strike prices. These options are presented based on the existing liquidity in the market.
Purchasing Options
Browse and Select Options: Browse through the list of available options. You can expand or collapse sections and scroll to view different options. To initiate a trade, check the box next to the desired strike price(s) to add them to the trade tab.
Select Expiry and Quantity: Choose the expiry time (hourly, daily, or weekly) and specify the quantity of options you wish to purchase.
Confirm and Purchase: Once all the details are set, confirm your order to purchase the selected call or put options.
Managing and Exercising Positions
View Current Positions: You can view your current positions under the “Buy Position [B]” section, adjacent to the Option Chain. This section displays all the options you’ve purchased.
Exercising Profitable Positions: To exercise a profitable position at any time before expiry, select the position and click the “Exercise” button. This allows you to buy or sell $DMT at the strike price, depending on whether you hold a call or put option.
Reviewing Trade History: Click on the “Trade History [H]” section to review all your past trades, helping you keep track of your trading activities.
In addition to trading options, you can also provide liquidity to the market. You can earn premiums as well as V3 Liquidity pool trading fees for your $DMT and or $Weth deposits.
Liquidity Provision
Navigate to the Liquidity Provision Section: On the trade page, Go to the “Liquidity Provision” section.
Providing Liquidity to Preferred Strikes: You can select specific strike prices to provide liquidity in the "Option Chain [C]" section.
Review Liquidity Positions: Your liquidity positions can be reviewed in the “LP Positions [L]” section. This will show you the current state of your investments and potential earnings.
Liquidity below the market price of $DMT will be deposited in $WETH . Liquidity above the market price of $DMt will be deposited in $DMT.
Reserving Liquidity
To "Reserve Liquidity," follow these steps:
Navigate to the Trade Page: Access the trade page via the side menu.
Select the Liquidity Pool: Choose the specific liquidity pool you wish to reserve liquidity in, such as the ETH/USDC pool.
Select “LP Positions [L]”: This will display all your liquidity positions.
Manage Liquidity Positions: Click on “Manage” and then “Reserve” next to the position you want to reserve.
Specify the Amount: Scroll to specify the amount of assets you want to reserve in the selected pool.
Confirm the Reservation: Review the details and confirm the reservation. The system will then allocate your specified assets to the liquidity pool, which can be withdrawn in the next cycle.
To withdraw your liquidity, follow these steps:
Manage Positions: Click on the “Manage” button next to your deposit in the "LP Positions [L]" section.
Select Strikes for Withdrawal: Choose the specific strikes from which you wish to withdraw liquidity.
Withdraw: Click on the “Withdraw” button to withdraw your liquidity.
Users incur fees for executing transactions, such as trading options or providing liquidity, within Leverage Machine. These fees are calculated as a percentage of the transaction value. For example, when purchasing options, a fee will be deducted based on the amount of $DMT or $WETH involved in the transaction. Similarly, when providing liquidity, fees will be incurred based on the value of liquidity provided. These fees contribute to the $SP protocol revenue pool.
Trading options offers several advantages over traditional futures or perpetual contracts:
Limited Risk Exposure: With options, you can only lose the premium paid to enter the trade, making it a less risky option compared to futures, where losses can be unlimited.
Flexibility in Strategy: Options allow you to create various strategies such as covered calls, protective puts, straddles, and strangles, offering more flexibility to manage risks and potential returns.
Leverage with Lower Capital: Options provide leverage, allowing you to control a larger position with a relatively smaller amount of capital compared to futures.
Time Sensitivity: Options have a defined expiry, allowing traders to benefit from time decay if they anticipate the market to stay within a certain range.
No Margin Calls: Unlike futures, where margin calls can occur if the market moves against your position, options do not have margin requirements once the premium is paid.
No Fear of Liqudiation : With options, your position cannot be liquidated based on price action of an asset.
Stay Informed: Keep up-to-date with market news and trends related to $DMT, $WETH, and the broader crypto market to make informed trading and liquidity decisions.
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