Options contracts can help to stabilize the price of an asset. Or a peg. Lets take a simple options strategy. Selling puts. A promise to purchase an asset at a specific price and by a certain time.
Well say iusd is at .96 for the example. You open a contract: a promise to purchase 100 iusd if it goes below .90 on Dec 31st.
You actually get paid up front to make this promise. We’ll say we can get you .03 iusd if it stays above .90 on Dec 31st. So you make $3 iusd upfront on a 100 iusd promise. It sounds like a small return but it’s 3+% in just a few weeks🤷
If iusd goes to zero on or after Dec 31 and never comes back then you would lose a max of $87. Because you took in $3 to make the deal and had to buy 100 iusd at .90. Net loss $87
Best case is iusd stays above .90 on dec 31st and you keep the $3 and never have to purchase iusd. The contract is over and you can potential do it again for the next couple weeks.
Let’s say iusd goes to .87, You are still required to buy it at .90 but are break even! This is because you took in the 3 iusd upfront. You really only start to dip in the red below .87
Its actually bullish for iusd because you’re betting the asset doesn’t go down. And are willing to purchase it and own but only at a discount. So we can see the demand for iusd at certain prices and a market is created. A medium is established.
Kind of like getting paid just to have a low buy limit order on an asset for a certain amount of time. If it never hits then you still get paid.
You can get in and out of the contract on or before the need to potentially have to purchase 100 iusd at .90.
If iusd starts getting close to .90 and you want to get out of the contracts then you may have to buy your way out. Not likely for the $3 iusd that you received. It may cost $5 or $6 at this point, depending on how low the price is and how close you are to dec 31st
If iusd starts going higher before dec 31st then you could end your contract early by purchasing it back. It might cost only $1 or less depending on how close you are to dec 31st and how high the price of iusd is.
You may not be forced to purchase iusd before Dec 31, even if it goes below .90 throughout that waiting time. But sometimes you could be forced to purchase iusd if it goes below .90 before dec 31.
The beauty of the chain is whoever writes up the contracts can get creative and work out the details of getting in or out early. Getting executed/put the asset before the contract is over. or needing to put up the collateral 100 iusd at .90 up front or at the time of expiration