Make the most profit with the smallest risk. Advanced Defi gameplay: Defi option strategy

Option products are now becoming more and more popular among DeFi users. It provides investors with a unique way to benefit. Its risk exposure is different from liquid mining or pledge. It has the opportunity to obtain option premiums without having to deal with options directly. There are many Defi protocols that use different option combinations, package them under one strategy, and provide them directly to users. This type of strategy is a "structured product" in traditional finance. (Structured products in traditional finance are generally based on a fixed income product, plus one or more financial derivatives based on a certain basic financial product or index.)

A structured product is a financial instrument that is packaged and provided to users, in this way, allowing investors to easily use complex investment strategies. As far as DeFi is concerned, options-based portfolio strategies are currently the most in demand. For readers who don’t know what options are, options are financial derivatives based on the value of the underlying assets. Options contracts provide buyers with the option to buy (call) or sell (put) related assets (the corresponding crypto market is Bitcoin, Ethereum, etc.) The return depends on the strike price (exercise price) of each option, and of course the value of the time dimension (options will lose value over time). Now some decentralized option agreements are being used more and more, such as the following:

The decentralized options market is the basis that allows the design of the structured products we are going to introduce today. These products are at the forefront of innovation because they provide a unique way to benefit, not from traditional token issuance, asset lending or transaction fees, but from selling call or put options to earn a premium.

Their risk is relatively small compared to vanilla options strategies. Out an underlying asset. Vanilla options consist of call options (rights to buy) and put options (rights to sell).), but the rate of return may be negative based on price action, so of course they are not risk-free assets. For DeFi users, this is the simplest and easiest way to obtain these yields. At the same time, it does not require investors to fully understand the complexities of options, such as Greek parameters or complex hedging strategies. The most attractive agreements currently offering this structured product are:

Option strategy used

The main risk that users deposit in the option strategy library is the change in the price of the asset or the loss caused by the expiration of the call option. Since the choice of the strike price is crucial, the goal of the agreement is to make efforts to choose the strike price to avoid losses, and to maintain the profitability of the strategy as much as possible to achieve a conservative risk profile. According to our experience, the price level corresponding to the selected exercise price is generally about 25% higher than the current price. This exercise price is selected by permission (off-chain), not automatically, which leaves some hidden dangers. For example, if there is any error in selecting the strike price, a malfunction may occur, or there may be perpetrators. This may bring huge losses to the strategy library. So far, this situation has never happened, and the possibility is very low, but it is still worthy of vigilance. The advantage of manually adjusting the exercise price is the flexibility of the agreement to adapt to the unexperienced market conditions that may significantly change the current rate of return. Perhaps one direction to be explored in the future is to feed the price to the algorithm based on the implied volatility index provided by the oracle (such as Chainlink), and finally select the execution price.

Back to the mechanism, the functions of these policy libraries are different from most other DeFi policy libraries, and assets in other Defi protocols can be withdrawn at any time. But in these agreements, once the user's funds are used for the regular strategy of the strategy library, they cannot be withdrawn until the vault closes its position (weekly or monthly, depending on the different terms of each agreement). Users can withdraw their funds during the lock-up period when the vault closes their previous positions and opens their new positions. This time limit is usually several hours.