So now Counterparty A has shown they have sufficient reserves to make good on the put options. Next, we must somehow force transfers from the reserve address to the outstanding colored coins, should the puts expire in the money. I dont think this process can be entirely trustless because we need to agree on the bitcoin/USD price; however, I think by using multisig with keys held by neutral third parties, that we could at least make it completely transparent. Any fraud should be obvious and provable.
There is no need to agree on the going rate when using PUT options, if the options are actually settled (and not contract-for-difference). I don't know which kind of options the market participants would prefer, but every time I offer to issue PUTs, I want them to be settled in an actual trade at the strike price, or expire worthless.
Building a synthetic derivatives market on top of something as fickle and easily manipulated as the USD/BTC exchange rate is a call to even more short-term manipulation and volatility.You bring up a good point. I too wonder if this would increase or decrease volatility. The fact that everything is fully transparent might help to mitigate whales from painting the tape near options-expiration dates. I don't know what would cost more: painting the tape or making a few more bucks on the options.
What I'm trying to do here is brainstorm the lowest-risk decentralized method for hedging against the USD/BTC exchange rate.