DeCalls Whitepaper

What Are "NFT Options"

Simply put, NFT options are contracts that give individuals the right to buy or sell an NFT at a specified price.
Still confused? Let’s put it another way.
Imagine you have FOMO for a big project (though perhaps you don’t have to imagine). For the sake of example, let’s say the project is Solana Monkey Business and the floor price is currently 175 SOL.
You have a feeling the price is about to skyrocket, but at the same time 175 SOL is a lot of money (i.e., a lot to risk) and it could just as quickly go south. Wouldn’t it be nice to have the option to buy SMB at 175 SOL only if the price goes up, but not if it goes down?

That’s where DeCalls come in.

A certain SMB holder hears your predicament and decides to make a contract with you. He will sell you the right to buy his SMB at 175 SOL in 30 days. For this agreement, perhaps he asks for 5 SOL as payment for giving you this opportunity.
You agree and pay the 5 SOL, so now the SMB is held in escrow for 30 days. At any time before the contract expires, you can decide whether or not you want to buy that SMB. If you were right and the floor price jumps up to 200 SOL, you can “exercise” the option and acquire the SMB for 175 SOL. In this scenario, you’d have made a profit of 20 SOL (i.e., 200 SOL current price - 175 SOL purchase price - 5 SOL option price).
Conversely, if in 30 days the SMB floor falls to 150 SOL, you can forego the option and simply let it expire. In any event, your loss is capped at 5 SOL (the price you paid for the option) which is better than having lost 25 SOL if you had bought the SMB outright.
In addition to buying the option to buy an NFT at a certain price, you can also buy the option to sell an NFT at a certain price. Holders may choose to do this to hedge their risk in case prices fall drastically.
To reuse the previous example, let’s say you hold SMB and the floor price is 175 SOL. You’re worried that Sam Bankman-Fried might nuke the markets with FTX insolvency issues, so you decide to purchase some insurance via an option to sell your SMB for 175 SOL in 30 days. Someone else agrees that if you pay them 5 SOL, they will allow you to sell your SMB to them at the stated price.
Pretty soon you find SBF is bankrupt and the SMB floor price drops to 100 SOL as people panic sell into zero liquidity. You are not worried, however, since you locked in the price to sell for 175 SOL with your option which you can exercise at any time before expiration. For a small fee of 5 SOL, you protected yourself from a drastic loss of 75 SOL.
Hopefully the concept of “NFT options” makes sense now. In TradFi, there are two types of options: calls and puts. Calls allow you to buy if prices go up, and puts allow you to sell if prices go down.

Final Comments

On a final note, it’s worth mentioning that while options can be used to protect investors from rapid price movements, they’re frequently used as a way to trade for profit as well. Since a small payment for an option (known as the “option premium”) gives the buyer exposure to much larger price movements of the underlying securities (in this case the NFT floor prices), options function as a sort of leverage.
Option traders do not have to hold their contracts till expiry, neither do they have to exercise them. The option contract they hold has dynamic value of its own, and that contract can be sold to another individual at any time.
So let’s say you purchased a 30-day Call option for SMBs with 175 SOL strike price. Since the floor was 175 SOL at the time, you purchased the Call option for 5 SOL. But if within a week the floor price jumps to 200 SOL, that Call option you hold has 25 SOL worth of intrinsic value (i.e., the difference between the floor price and your option’s strike price). You can now sell that contract for 25 SOL, making a 5x return on your investment.
The same can be done with Put options, meaning you can profit from floor prices dropping by trading options without ever owning the NFT itself.
Sounds interesting? Let’s talk about how to actually buy or sell a DeCalls option.