How are trades settled on Sparrow?

What is Settlement?

Settlement is a process that takes place on the Settlement Date to determine whether your option will settle In-The-Money or Out-The-Money. Smart Contracts calculate the difference between the Strike Price and the Settlement Price to determine how to transfer assets appropriately to Buyer and Seller.

Sparrow Options are European which means they can only be settled on the Settlement Date. If Sparrow Options are In-The-Money, they are automatically settled. If they are Out-The-Money, the underlying assets are returned to the Seller.

Sparrow Options are cash-settled. The cash settlement amount is the difference between the Settlement Price and Strike Price. This is unlike physically-settled options, where settlement is done with the physical delivery of the underlying assets.

Settlement 

What happens at Settlement?

  1. Sparrow Options are automatically and transparently settled by Smart Contract on Settlement Date
  2. The Smart Contract will determine if the option is In-The-Money or Out-The-Money
  3. If it is In-The-Money, the Smart Contract will calculate the Cash Settlement and Transfer Assets accordingly
    a) Cash Settlement
    = Difference between Settlement Price and Strike Price
    b) Transfer Cash Settlement to Buyer
    c) Transfer Pledged Assets less Cash Settlement to Seller
  4.  If it is Out-The-Money, the Smart Contract will Return Pledged Assets to the Seller

If you Bought a Call Option

In-The-Money Settlement

  • Receive cash settlement in underlying assets  

Out-The-Money Settlement

  • No further action is required

Note: Premium Payable are non-refundable regardless of outcome.

 

If you Bought a Put Option

In-The-Money Settlement

  • Receive cash settlement in underlying assets

Out-The-Money Settlement 

  • No further action is required

Note: Premium Payable are non-refundable regardless of outcome

If you Sold a Call Option

In-The-Money Settlement

  • Receive Pledged Assets after cash settlement deduction  

Out-The-Money Settlement 

  • Receive Pledged Assets in full 

Note: You keep the Premium Receivable for selling an option regardless of outcome


If you Sold a Put Option

In-The-Money Settlement

  • Receive Pledged SP$ after cash settlement deduction 

Out-The-Money Settlement

  • Receive Pledged SP$ in full 

Note: You keep the Premium Receivable for selling an option regardless of outcome

 

Quick Summary

Note: Premiums Payable and Receivable are non-refundable regardless of outcome.

 

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FAQ 

What is Sparrow’s settlement type?

Sparrow Options are cash-settled, whereby settlement is done via the payment of SP$ or the underlying assets equal to the difference between the market value and the contractual value of the underlying asset on Settlement Date.

This is unlike physical settled options, where settlement is done with the physical delivery of the underlying assets.

 

Why are Call options settled in the underlying assets? 

Sparrow has specially designed this settlement system to account for extreme market situations such as when the price rallies too much. This will help to protect both buyer and seller by preventing counterparty risk, where there is a possibility that either the buyer or seller might default on his or her contractual obligation.  

Example: If you make a BTC/USD sell Call option trade and the price of BTC rallies – With BTC as the pledged collateral instead of SP$, counterparty risk will be negated as the BTC previously pledged by the seller will be sufficient to settle with the buyer at the agreed upon rate of equivalence.

 

Why are Put options settled in SP$? 

Sparrow has specially designed this pledging system to account for extreme market situations such as drastic price dips. This will help to protect both buyer and seller by preventing counterparty risk, where there is a possibility that either the buyer or seller might default on his or her contractual obligation.  

Example: If you place a BTC/USD sell Put option trade and the price of BTC drops drastically and becomes worthless – With SP$ as the pledged collateral instead of BTC, counterparty risk will be negated as the SP$ previously pledged by the seller will still be able to settle with the buyer at the agreed upon rate of equivalence.  

 

DISCLAIMER

The information provided here is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.

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