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Tutorial - First steps

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Purchasing your first option

This tutorial introduces the interactive components of the beta currently running on the Avalanche Fuji testnet. Stay tuned for an analysis of the principles underlying the Arrow pricing mechanism.

Quick Review of Arrow Markets’ Features

In the traditional options market, options must be sold by a writer who collects the premium from the buyer and who 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 with such a counterparty. Arrow will facilitate the creation and settlement of options on popular underliers like AVAX, ETH, and BTC. For a more detailed introduction to Arrow Markets, you can refer to our introductory blog post or our litepaper.

Getting Started

Navigate to the beta at https://fuji-beta.arrow.markets/

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 two modes to view option quotes. Let's first introduce the LITE mode (useful for those new to options trading).

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The price of an option is related to its strike price and the time to expiration. The strike price is the price at which an option will start paying off — so the call option starts paying off as the underlying asset price goes above the strike price and a put option starts paying off as the underlier’s price goes below the strike price. So 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 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 on the left is the expected profit and loss chart on expiration. Let's check and 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. You need to pay $5.41 to get this option, 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 + the option 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 (roughly speaking, 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.

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We can also examine the table view by selecting “TABLE 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!