CRV - 18 May 2022
The Dopex Community Analyst series is a series of strategies, ideas, opinion pieces and educational resource written by independent contributors from the Dopex community. Every month many knowledgeable community analysts share a short analyses of a coin of their choice and share these with Dopex. The goal of these articles is to empower the community and help Dopex increase SSOV volume & deposits. With these articles we hope to provide users with additional information that will help them in making an informed choice of strategy using our products.
Without further ado let’s jump into our next article.
Token Overview
- Market cap: $1.07 Billion
- TVL: $17.2 Billion
- FDV: $8 Billion
- Circulating Supply: 444 Million
- Total Supply: 3.3 Billion
- Price: $2.42
Quick overview
Curve is an AMM that rose to prominence over the last two years with their novel way of pricing stable assets. It offered better prices, less slippage for pegged assets (think USDC to USDT). They have since launched v2 pools, which allow more efficient trading between non-pegged assets (think ETH to DPX). CRV is the governance token of the protocol which, when staked becomes veCRV (voting escrow CRV):
- Allows you to vote on various protocol proposals, as well as directs emissions of new CRV.
- Accrues fees (50% of all the trading fees go to veCRV holders).
- Allows you to boost your LP rewards from 1 up to a maximum of 2.5 boost.
With TVL among the top for all DeFi protocols, and the amount that has been built on top of it, CRV has cemented itself in the center for DeFi and interest for acquiring CRV has been steadily increasing as other protocols look to secure emissions to attract liquidity for new token issues.
But locking up your tokens for a long time for the rewards can be scary if the market does tank and there isn’t an easy way for you to get out of your positions if you need to sell. Also, you might be willing to buy should the price dip further with a long term view in mind but don’t want to have to constantly check prices in order to do so. Using options, you can combine strategies to effectively hedge your medium downside risk, while setting yourself to automatically buy should the price go below a pre-determined price.
Strategy: Protecting downside while setting up to buy the dip!
With the current market conditions, the chances are that you might be worried about the potential downside of your assets, and maybe you have them staked and not readily available to sell to reduce your downside risk. You may be waiting in stables on the sidelines for an opportunity to buy should the prices go lower. Well, this strategy might interest you! This strategy assumes that you own CRV and want to hedge, but given it’s puts you don’t need to own any CRV to implement the strategy, as it only requires stables.
There are a few names for this, some call it a put ratio, some call it a Put 1x2. If you are not familiar with options, I suggest you check out the academy, or I wrote a thread on it here (https://twitter.com/DefiThreader/status/1512781198459871237). So how does it work?
Buying downside protection through puts might seem expensive, but you can cap the cost by buying what is called a put spread. This is when you buy one put with strike K1 and sell another put with strike K2 (where K2 < K1). As you are selling a further OTM put you can reduce the overall cost of the hedge. This does only provide a hedge for your puts down until K2, however. This is a simple put spread as it is traded in a 1x1 fashion, where every K1 put you buy, you sell another put on strike K2. Which is good, but we can take it a step further by adding in a second sell of the K2 put, which is where the name put ratio comes from. This again reduces the cost of the downside protection, and should CRV expire lower than the K2 strike, you will get exercised and buy CRV for that price.
To put some quick numbers on the problem I have predicted some rough option prices using a simple Black Scholes model for a full week but shown the current prices (Sunday of an epoch), so prices will vary but it’s a good guide in preparation for the next epoch.
CRV Price : 2.42
Strike 1: 2.3
Strike 2: 2.15
Current 2.25 Put Premium: 0.0866
Current 2 Put Premium: 0.0413
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**Put ratio cost = 0.0866 – 2 * 0.0413 = $0.004
So the overall cost of this strategy is just 0.4c per token right now that you want to use this strategy on. As you can see hedging the downside outright might be more than you’re willing to spend but if you have a balanced portfolio with stables waiting to be deployed to buy dips, this is a way to set yourself up to buy these dips while reducing your short-term downside risk at the same time. This strategy isn’t specific to CRV either, any of the SSOVs with puts could be used in a similar fashion for any asset that interests you.
Also, I must note that I am writing this on a Sunday so these live prices, are actually 2 days into the epoch. Assuming the 131 implied vol for the above, were you to enter into this strategy when the epoch goes live (this will be dependent on the spot price, but I calculated using $2.42 at the time of writing) the price for the strategy is actually a $0.01 credit per token, so you would actually be paid to have this position on.
So, as we can see in the above graph the strategy is providing downside protection for moves down to $2 and lower than that you essentially buy another CRV token so as the price continues to move lower the PnL of holding 2 CRV tokens performs worse than holding 1! But if you were thinking of placing limit orders at $2 for CRV tokens this is a way to effectively be better off for smaller down moves, and should we never go below the lower strikes, if you receive premium for the position you will be better off than simply holding 1 CRV token. Should you own 1 CRV and have a limit order at $2 to buy another, then this strategy performs exactly the same below $2 and is strictly better if we never go that low. This is not a strategy to fully protect your downside (that’s what outright puts are for) but if you are looking for some yield and want to be positioned to buy dips then this strategy could be for you.
Disclosure:
Nothing here is financial advice, these are simply potential trade ideas to educate the community. I do own CRV tokens. If you enjoyed this post I write similar articles on a variety of DeFi topics at defithreader.substack.com, and @DeFiThreader on twitter.
Author: @DefiThreader, https://defithreader.substack.com/
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Views expressed in this article are the author’s own and not reflective of the position or professional views from Dopex.io.
Dopex reimburses analyst contributors with a small payout to partially compensate the time spent on research and writing. For questions feel free to jump into our discord (discord.gg/dopex) and chat with the team or analyst contributors directly.
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