Glossary

ATM

At the money. A situation where the options strike price is identical to the current market price of the underlying security. If BTC is trading at $42,000 and the strike of an BTC call is $42,000, that call is ATM.

Automated Market Maker

A bundle of contracts which accepts and manages liquidity. The entity that replaces centralized order books, which both buyers and sellers interact with. The AMM determines price through a combination of token reserves, price function, and an oracle.

Bilateral Tokenization

The tokenization of both short and long sides of a contract. OSM employs bilateral tokenization to keep track of both long and short sides of the contract universally by counting the balance of bTokens/wTokens. This also allows for the passive/automatic implementation of the writer’s role in the OSM protocol.

Black Scholes Price Formula

An equation for calculating an option’s price based on strike, expiration, and implied volatility. This formula is used in combination with a price oracle and token reserves by the OSM AMM to determine option pricing.

bToken

A token representing the long side of an option series trade. At expiry bTokens only have value when an option is ITM. Keeps track of both long and short positions universally by counting the balance of b/wTokens.

Cash-Secured Put

A put option in which the writer deposits an amount equal to the strike price into an account in case the option is exercised. This ensures the writer will be able to meet the obligations of the contract. wTokens simulate this implementation with locked collateral in put contracts.

Cash-Settlement

A settlement method used for options contracts where upon expiration, instead of delivery of the actual underlying asset, an equivalent cash position is transferred. Cash-settlement alleviates the buyer from paying the strike price in order to exercise an option.

Collateral Token

The ERC20 Token used to underwrite an option series. Each option must contain locked up collateral to guarantee payment to traders upon exercise.

Covered Call

Similar to a cash-secured put, when the writer selling calls owns an equivalent amount of the underlying security thus ensuring the seller’s ability to deliver the shares if the buyer chooses to exercise. wTokens achieve this with locked collateral in call contracts.

European Option

A version of an options contract that limits execution to its expiration date. Investors are not able to exercise the option early.

Expiration Date

The block time when an option series expires and is no longer purchasable on the AMM. When a series is expired its bTokens and wTokens can be redeemed for their locked collateral.

ITM

In the money. Refers to an option that has value in a strike price that is favorable in comparison to the prevailing market price of the underlying asset. That is, the asset price will have exceeded the strike price for a call on that asset, or the opposite in case of a put.

Collateral Liquidity Provider

Abbreviated as CLP’s, liquidity providers are users that add assets to an AMM pool. CLP’s provide liquidity to the AMM to be used for minting and selling bTokens.

CLP Token

The token CLP’s receive for providing capital to the AMM. The CLP token is an IOU for CLP’s collateral token. A CLP can burn their CLP token and receive their share of the AMM’s value.

OTM

Out of the money. An OTM call will have a strike price higher than the market price of the underlying asset. An OTM put will have a strike price lower than the market price of the underlying asset. If an option expires OTM, it has no value.

Premium

The option price offered by OSM when buying or selling bTokens or selling wTokens. The protocol determines this price through a combination of a price oracle, Black-Scholes price function, and calculations of the liquidity reserves.

Pro Rata

A Latin term used to describe a proportionate allocation. When the AMM distributes value pro-rata to CLP’s, it is distributed in proportion to each CLP’s share of the total supply of CLP tokens for that AMM. If an CLP has provided 10% of all liquidity to an AMM’s pool, that CLP will receive 10% of premium yield from options minted off that liquidity pool.

Spot Price

The price of a token on the open market. The protocol obtains the spot prices of various tokens using onchain oracles such as Chainlink.

Settlement Layer

The set of smart contracts responsible for the creation of options through the process of bilateral tokenization, minting tokens and locking up collateral. The Settlement Layer is responsible for the exercise of bTokens and the claiming of wTokens on option expiry.

Settlement Price

Spot price of a series’ underlying token once the series has expired and payout is being calculated.

Price Impact

The impact of a trade on its own price. The larger the trade, the more expensive it will become to transact.

Underlying Token

The token whose price determines the moneyless of the option. As the price of the underlying token changes, so does the premium of the series. For ETH Call and ETH Put series, the underlying token will be ETH.

wToken

A token composed of the short side of the contract combined with the collateral, representing a covered call or cash-secured put. wTokens are minted together with bTokens by the AMM as it locks up the collateral for an option series trade. wTokens are held by the AMM and the process of LP’s claiming wTokens is managed by the Settlement Layer.