0062 XLS-62d: Options

[dangell7]

XLS-62d Options — Options for XRPL Protocol Chains

Title: Options
Type: Draft
Author:
	Denis Angell, XRPL-Labs <a href="https://github.com/dangell7/">(dangell7)</a>
Affiliation: XRPL-Labs

Problem Statement

The current (XRPL) protocol provides a robust and efficient platform for transferring digital assets and currencies. However, there is a growing demand for more advanced financial instruments, such as options, which are not natively supported by the XRPL in its current form. Options are financial derivatives that give buyers the right or obligation, to buy or sell an underlying asset at a predetermined price within a specified time period. The lack of a standardized protocol for creating and managing options on the XRPL protocols limit the functionality and potential use cases for the ledger. To address this gap and enhance the capabilities of XRPL protocols, we propose a new amendment that introduces a lightweight and flexible framework for options trading. This will enable developers and users to create, trade, and exercise options, thereby expanding the financial utility of XRPL protocols and opening up new opportunities for decentralized finance (DeFi) applications.

Disclaimer

This decentralized investment vehicle involves the creation and use of options, which are complex financial derivatives. Users should be aware that engaging with options carries significant risk and requires a deep understanding of the mechanisms involved.

Licensing Requirements for Listing Options:

• Entities or platforms that list options for trading may be required to obtain the appropriate licenses and authorizations from regulatory authorities.
• Users who intend to list options must ensure that they are in compliance with all relevant financial regulations and have obtained any necessary licenses or approvals.

Accreditation and Sophistication Requirements:

• Participation in options trading may be limited to accredited, sophisticated, or otherwise qualified investors, depending on the jurisdiction and the nature of the investment.
• It is the user's responsibility to confirm their eligibility as an accredited or sophisticated investor and to possess the requisite knowledge to understand the risks associated with options trading.

Legal and Regulatory Compliance:

• All users must adhere to the legal and regulatory requirements of their respective jurisdictions when interacting with options.
• Failure to comply with these regulations can lead to legal penalties, including fines and other sanctions.

Due Diligence and Professional Advice:

• Users are urged to conduct thorough due diligence and seek advice from a certified professional or financial advisor before engaging in options trading.
• The creators, developers, or facilitators of this decentralized investment vehicle do not provide financial advice and are not responsible for ensuring user compliance with licensing or qualification requirements.

No Financial Advice:

• The information provided regarding options within this decentralized investment vehicle is for informational purposes only and should not be construed as financial advice or a recommendation to trade.
• Users must make their own informed decisions and assess the risks and benefits of participating in options trading.

Amendment

The proposed amendment introduces a new framework for options trading on the XRPL protocols, providing a lightweight and flexible way to create, trade, and exercise options, thus expanding the financial capabilities of the XRPL for decentralized finance applications.

The amendment adds:

• A new type of ledger object: ltOPTION
• A new type of ledger directory: OPTION_DIR
• A new type of ledger object: ltOPTION_OFFER
• A new serialized Hash256 field: OptionID
• A new serialized UInt64 field: Quantity
• A new serialized Hash256 field: SealedID
• A new serialized Hash256 field: SwapID

Three new transaction types:

• OptionList
• OptionCreate
• OptionExecute

New Ledger Object Type: Option

The Option ledger object is a new on-ledger object that is created with the OptionList transaction. This object represents an option contract on the XRPL, detailing the terms under which the option can be exercised.

The object has the following fields:

Field	Type	Required	Description
sfAmount	Amount	✔️	The underlying asset and the strike price. The value of the amount is the strike price.
sfExpiration	UInt32	✔️	The time at which the option expires.

Example Option object:

{
   "LedgerEntryType": "Option",
   "Amount" : {
      "currency" : "USD",
      "issuer" : "rHb9CJAWyB4rj91VRWn96DkukG4bwdtyTh",
      "value" : "10"
   },
   "Expiration": "745329202",
}

New Ledger Object Type: OptionOffer

The OptionOffer ledger object is a new on-ledger object that represents an offer to buy or sell an option contract on the XRPL. This object is used to match buyers and sellers in the options market, facilitating the trading of options contracts.

The object has the following fields:

Field	Type	Required	Description
sfOwner	AccountID	✔️	The account that created the offer.
sfOwnerNode	UInt64	✔️	Reference to the owner directory node that the OptionOffer object is part of.
sfOptionID	Hash256	✔️	A unique identifier for the option, which is also the OptionID.
sfAmount	Amount	✔️	The locked shares in the option contract. The quantity as an Amount.
sfPremium	Amount	✔️	The premium of the option contract. This is the price that the buyer pays to the seller for the option.
sfQuantity	UInt64	✔️	The quantity of shares in the option contract. Must be in multiples of 100.
sfSealedID	UInt256	❌	An optional identifier for matching the offer with a specific counterparty or transaction.
sfSwapID	UInt256	❌	An optional identifier for a swap transaction associated with the option.

Example OptionOffer object:

{
   "LedgerEntryType": "OptionOffer",
   "Owner": "rU9XRmcZiJXp5J1LDJq8iZFujU6Wwn9cV9",
   "OwnerNode": "0000000000000000",
   "OptionID": "C24DAF43927556F379F7B8616176E57ACEFF1B5D016DC896222603A6DD11CE05",
   "Premium": {
      "currency" : "USD",
      "issuer" : "rHb9CJAWyB4rj91VRWn96DkukG4bwdtyTh",
      "value" : "5"
   },
   "Quantity": 100,
   "SealedID": "D79DE793C6934943D5389CB4E5392A05A8E00881202F05FE41ADC2AE83B24E91",
   "SwapID": "E5F6AEBCC10B8C2A9C3B2A1C4A6EEBDBF5D48D6749F3A5B07B9FCDABB3F70279"
}

New Transaction Type: OptionList

The OptionList transaction is used to create a new option contract on the XRPL. This transaction specifies the terms of the option, including the underlying asset, strike price, expiration time, and the broker responsible for the contract.

Field	Type	Required	Description
sfTransactionType	String	✔️	The type of transaction, which is "OptionList" for listing a new option.
sfAccount	AccountID	✔️	The account creating the option contract.
sfIssuer	Issuer	✔️	The underlying asset.
sfExchangeRate	UInt64	✔️	The strike price.
sfExpiration	UInt32	✔️	The time at which the option expires, specified as a UNIX timestamp.

The Amount field represents both the underlying asset that the option contract pertains to and the strike price at which the option can be exercised. The Expiration field is a UNIX timestamp indicating when the option contract will expire and can no longer be exercised. The Broker field identifies the broker who will manage the option contract.

Example OptionList transaction:

{
   "Account": "raKG2uCwu71ohFGo1BJr7xqeGfWfYWZeh3",
   "TransactionType": "OptionList",
   "Issuer": {
      "currency" : "USD",
      "issuer" : "rHb9CJAWyB4rj91VRWn96DkukG4bwdtyTh",
   },
   "ExchangeRate": "1.25",
   "Expiration": 743171558
}

OptionList Summary

The OptionList transaction is a proposed transaction for creating option contracts on the XRP Ledger. When executed, it creates a new ledger entry representing the option, which includes details like the underlying asset, strike price and expiration date. If the transaction is successful, the option contract is officially listed on the ledger.

New Transaction Type: OptionCreate

The OptionCreate transaction is used to create a new option contract or to manage an existing one. This transaction can be used to buy or sell (write) a call or put option, and to open or close a position.

Field	Type	Required	Description
sfTransactionType	String	✔️	The type of transaction, which is "OptionCreate" for creating or managing an option.
sfAccount	AccountID	✔️	The account creating or managing the option contract.
sfOptionID	Hash256	✔️	The ID of the option ledger entry object.
sfFlags	UInt32	❌	A set of flags to distinguish the type of option contract and the action being taken.
sfAmount	Amount	✔️	The premium of the option contract. This is the price paid by the buyer or received by the seller.
sfQuantity	UInt64	✔️	The quantity of shares in the option contract. Must be in multiples of 100.
sfSwapID	UInt256	❌	An identifier for a swap transaction associated with the option, used when closing an option.

OptionCreate Flags

The OptionCreate transaction uses flags to specify the type of option, the action being taken, and whether the position is being opened or closed.

Flag Name	Value	Description
tfType	0x00010000	Leave unset for Call (default) and set for Put.
tfAction	0x00020000	Leave unset for Buy (default) and set for Sell (write).
tfPosition	0x00040000	Leave unset for Open (default) and set for Close.

The Amount field represents the premium of the option contract, which is the price paid by the buyer or received by the seller for the option. The Quantity field specifies the number of shares or units covered by the option contract.

The SwapID field is used when closing an option position and must specify the swap ID associated with the option being closed. In a decentralized exchange (DEX) environment, the matching of options would occur automatically and programmatically, and the SwapID would not be necessary.

Example OptionCreate transaction (Open Position):

{
   "Account": "raKG2uCwu71ohFGo1BJr7xqeGfWfYWZeh3",
   "TransactionType": "OptionCreate",
   "OptionID": "C24DAF43927556F379F7B8616176E57ACEFF1B5D016DC896222603A6DD11CE05",
   "Flags": 0, // Call, Buy, Open
   "Amount": {
      "currency" : "USD",
      "issuer" : "rHb9CJAWyB4rj91VRWn96DkukG4bwdtyTh",
      "value": "100"
   },
   "Quantity": 100
}

OptionCreate Summary

The OptionCreate transaction is used to create or manage options contracts on the XRPL ledger. It involves specifying the option details, adjusting account balances, and updating ledger entries. The transaction can seal options by matching buyers and sellers, and it handles the transfer of premiums and collateral. It supports buying or selling options and opening or closing positions.

New Transaction Type: OptionExercise

The OptionExercise transaction is used to exercise an option contract on the XRPL. This transaction allows the holder of a call or put option to exercise their right to buy or sell the underlying asset at the specified strike price.

Field	Type	Required	Description
sfFlags	UInt32	❌	If the tfExpire flag is set the option will be removed from the ledger.
sfOptionID	Hash256	✔️	The ID of the option ledger entry object.
sfOrderID	Hash256	✔️	The ID of the option order ledger entry object.

Example Option Exercise:

{
   "Account": "raKG2uCwu71ohFGo1BJr7xqeGfWfYWZeh3",
   "TransactionType": "OptionExercise",
   "FLags": 0,
   "OptionID": "C24DAF43927556F379F7B8616176E57ACEFF1B5D016DC896222603A6DD11CE05",
   "OrderID": "D5EB856370B233B4384D02613E6C71305C57BCA5FF4A5D857D4628DB9D72BC55",
}

OptionExercise Summary

The OptionExercise transaction on the XRPL allows a holder of an option contract to exercise their right to buy or sell the underlying asset at a set price. When this transaction is executed, it checks for the necessary permissions and account balances, transfers the asset and funds between the option holder and writer, updates the ledger, and then finalizes the transaction. If successful, the option is exercised, and the involved accounts are adjusted accordingly. If the tfExpire flag is set, the option is also removed from the ledger.

This proposal is still in draft. Please subscribe for updates and ask any questions below.

[xVet]

Great proposal Denis

[desimmons]

It the proposal, you say "Five new transaction types" but then only list three.

[dangell7]

Updated thank you

[desimmons]

IIUC, this draft doesn't consider American style options. Is that right?

[dangell7]

This draft is for American style options where exercise can be done anytime before expiration. European-style options can only be exercised at the expiration date of the option.

[desimmons]

Was trying to find statistics (didn't spend much): I can see that American style options are much more popular (for obvious reasons!?) than European. But would we want to accommodate European options at some point? If so, would European style options be implemented as a separate amendment or capture that as part of this amendment?

[dangell7]

I can do it in the ListOption with a flag. I think we should include both types.

Thanks for the input!

[shortthefomo]

From my going over this everything in the disclaimer is left to the interface implementing the protocol in their interface correct? none of those issues highlighted there could be addressed on ledger?

Maybe something could be looked at to leverage the DiD to "check" and flag some of those issue. eg, requiring a DiD that has the accreditation once that is added only then the option to use options becomes available.

[dangell7]

Correct. The DID/Credential is something that was introduced after this proposal and could be implemented.

[shortthefomo]

Another question reading over this once again is the Expiration is this yet another case where a standard timestamp is used and not ripple time stamp 🫣

Looking at other documentation it seems to be standard to offer fixed limits to this expiration? What happens in the case someone picks a date 1000 years out.

• 30 days
• 60 days
• 90 days
• One year

(Ah understanding the American vs European style covers this)

[dangell7]

Expiration is typically the third Friday of each month. There can be options with any expiration but if you want TradeFi then those listing options, would likely follow the regular guidelines as those with weird option expiration would never get any open interest.

As for ripple/unix I don't care, I would prob do ripple time and let the client convert.

[fabiansinani203]

A great proposal Denis! I would like to see it to be tested and progressed aswell.

[shortthefomo]

Strike price also is singular here is offering multiple strike prices not possible or something that could be worked on later as a follow up?

[dangell7]

Multiple prices is possible. You can create the entire option table with this.

However, the strike price is quoted in one currency. I would use RLUSD. You could do multiple but without pathing or some added functionality the Option in JPN would never cross the Option in USD.

Also, as a guideline, the option should always be quoted in the currency that is used to purchase the asset. So if its an US stock option then USD.

[shortthefomo]

I missed understanding that nice.

These are not active but passive objects as I understand, right so there is nothing monitoring when the option can be exorcised but rather that is required from a user to 'prompt' the execution of it via OptionExercise.

What happens in the case both parties never exorcise it? Is there a way like with escrows anyone could prod it and it would execute?

Agree with its up to participant to convert it to other currency if that is what they so chose after its execution.