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Tutorial - First steps

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Arrow Markets Testnet Tutorial

This tutorial introduces the interactive components of the beta currently running on the Avalanche Fuji testnet. Click here to read more about our trading competition. There is also a tutorial video on how to sign up for the trading competition.

Review

In the traditional options market, options must be sold by a writer who receives the premium from the buyer and is responsible for paying the buyer if the option is exercised in the money. As an options protocol on Avalanche, Arrow Markets will give users the ability to buy options without the need to be matched by a middle-man. Arrow will facilitate the creation and settlement of options on popular underlying assets such as AVAX, ETH, and BTC. For a more detailed introduction to Arrow Markets, you can refer to our litepaper or introductory blog post. For more details on the trading competition click here.

Registration

To register for the contest, we require users to sign in with their digital wallet and sign up with their Twitter account.

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Connect your Wallet

Navigate to the beta at https://www.arrow.markets/trading

Connect to Avalanche’s Fuji testnet using your preferred Web3 wallet (e.g. Metamask).

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Using the beta app

We now take AVAX as an example to introduce the specific interaction process. Arrow provides a LITE mode and Pro Version to view option quotes. Let's first introduce the LITE mode (useful for those new to options trading).

LITE Mode

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The price of an option is determined by the strike price and the time to expiration. A strike price is a fixed price at which a contract can be bought or sold when it is exercised. For instance, a call option starts paying off as the underlying asset price goes above the strike price and a put option starts paying off as the underlying assets price goes below the strike price. If you’re bullish on AVAX, you would purchase a call option on AVAX and if you’re bearish, you would purchase a put option on AVAX. To purchase an option, you would pay a premium now to the writer in exchange for a potential payout on the option's expiry date.

Based on your price forecast and your target date, the recommender will pick a strike price for your option. The amount you want to invest determines the number of such options you can purchase. In the above call option example, the closer the strike price is to the current spot price, the higher the option premium. The longer the time to expiration, the higher the option premium as well. Arrow’s option recommendation engine selects the option with the strike price that will maximize your profit based on your expectation.

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The picture above is the expected profit and loss chart on expiration. Let's calculate how we get the numbers above. The above option is an AVAX call option with a strike price of $112.49 and an expiration date of January 13. The premium is equal to $5.41, which gives you the right to purchase 1 AVAX at $112.49. You would exercise this option if the price of AVAX on expiry is greater than the cost of exercising it, which would be the price of AVAX + premium, which is 112.49 + 5.41 = $117.90 in this case. This is the breakeven point where the upward sloping line segment and x-axis intersect.

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Finally, we look a few attributes of this option (from left to right). First is the strike price, then DELTA (how much the option price changes to a $1 change in the price of the underlying), followed by THETA (how much the option price changes with each passing day), then GAMMA (how much the option DELTA changes to a $1 change in the price of the underlying), and finally profit and loss. If we exercise the option at the forecasted price of $129, we make a profit of $11.10.

Pro Version

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We can also examine the table view by selecting Pro View in the top right corner, which shows a list of quotes for options at different strike prices for different expiration dates. This is useful for more experienced traders.

Thank you to @Larry Xianping Lan#1704 on Discord for writing the first version of this tutorial in Chinese!