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Minting (Writing) an Option
Minting an option, often referred to as "writing" in traditional finance, means creating a new options contract and selling it in the market. When you mint an option, you're essentially the seller of the option and have the obligation to fulfill the terms of the contract if the buyer chooses to exercise it.
There are two primary options that can be minted:
- 1.Minting a Call Option: By doing this, you're agreeing to sell the underlying asset at the specified strike price if the option buyer decides to exercise. You collect the premium as income for taking on this obligation.
- 2.Minting a Put Option: Here, you're agreeing to buy the underlying asset at the specified strike price if the option buyer exercises the option. Again, you receive the premium as compensation for taking on this potential obligation.
Let's say you believe that the price of $MILK will remain stable, and you want to earn some income. You decide to mint a Call Option for $MILK with a strike price of 7.5 ADA, expiring in a month. You sell this option and collect the premium.
If the price of $MILK remains below 7.5 ADA by the time of expiration, the option will likely not be exercised, and you get to keep the premium as profit. However, if the price of $MILK rises above 7.5 ADA, the buyer might exercise the option, and you would be obligated to sell your $MILK tokens at 7.5 ADA, even if the market price is higher.
Similarly, if you mint a Put Option for $OPT with a strike price of 0.45 ADA, you'll earn the premium. If $OPT's price stays above 0.45 ADA, you keep the premium. If it drops below, and the option is exercised, you'll have to buy $OPT at the strike price of 0.45 ADA, even if the market price is, say, 0.35 ADA.