Use the least risk to make the most profit Defi advanced gameplay: Defi option strateg。

Time:2022-01-19 Source: 895 views DeFi Copy share

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 are composed 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:


  It can be said that Ribbon Finance is the most popular structured product agreement based entirely on options, with a total locked-in asset value (TVL) of more than US$200 million. The protocol operates in Ethereum , provides 6 different strategy libraries, and has a very wide asset coverage, such as USDC , w BTC , ETH or AAVE . Covered bullish and bearish selling strategies are widely used in this agreement. In the past, almost all strategy libraries of the agreement have reached the upper limit of locked assets, but recently it has expanded the upper limit to tens of millions to billions. Ribbon's total assets account for a considerable share of the entire options market.

  The option market used in these strategies is the Opyn protocol. The fees charged by the agreement to users are 2% annual management fee and 10% weekly performance fee. If the weekly strategy is profitable, the weekly performance fee is charged based on the premiums earned, and the weekly management fee is charged based on the assets managed by the strategy library. If the weekly strategy is unprofitable, no fees will be charged.

  These costs are currently included in the DAO warehouse, but the upgrade is in progress, and the project team plans to transfer these costs to the Ribbon token holder's account. The plan is to direct tokens to certain specific strategy libraries, but the final result depends on members' votes, similar to how Curve Gauges works. Interestingly, these fees can also be used to mitigate the effects of black swan events, such as the global market recession.

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 strategy libraries are different from most other Defi strategy 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.


  This strategy generates revenue by combining the purchase of spot assets and the sale of options. It automatically sells out-of-price call options and covers the position by locking in collateral of equivalent assets. This strategy obtains a premium as a return by selling options, and the premium is added to the strategy and compounded to produce an annual percentage return. This can be easily understood from the next chart, where price changes are plotted on the X axis, while profits and losses are represented on the Y axis.

  The main risk of running this hedging strategy is that if the call option sold by the strategy library expires higher than the original call option strike price, the strategy may incur losses.

  Risk status, transaction parties and strategic capacity

  Various strategies are inherently profitable, because the historical weekly returns of most investment assets tend to follow a normal distribution. Although in stocks and cryptocurrencies, price behavior has been slightly asymmetric so far, it is still moving on the positive side. Investors can take advantage of this trend and invest in assets that may fall in the center of the distribution rather than the tail to obtain returns, because these returns are less likely to be realized. This is what is commonly referred to as asymmetric investment. The distribution of Bitcoin's weekly returns can be seen in the next chart.

  For example, if the weekly rate of return does not exceed 0.25%, then traders can earn profits in most cases.

  Regarding the counterparty, or who sells or buys the options used by these strategies on the other side, the answer is usually the market maker. Other traders participate in selling these options, such as in Opyn, and market makers become the counterparty to buy options through auction bids. These market makers hedge their risks by buying assets in the spot market or positioning them in futures contracts. This is a common technology widely used in the traditional market, which can maintain delta neutrality, so it is not affected by the price action of the subject matter, and at the same time, a premium or spread can be charged. Ribbon V2 uses public auctions through Gnosis, while StakeDAO uses Airswap to sell to market makers on the whitelist. Dopex issues options directly by itself. These auction prices are better than centralized options exchanges such as Deribit, so market makers also have the opportunity to arbitrage between them.

  Regarding the capacity of each strategy, since the liquidity provided by these market makers and other traders in the options market is limited, the capacity provided by the strategy library is also capped. If the popularity of these products continues to grow, then the liquidity in the natural options market will also increase, which can increase the capacity of the strategy library and create a virtuous circle.

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