rDPX - 16 August 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.
August ETH Analysis
By: BowTiedProngHorn
Token & Position Introduction
The merge is getting closer and after a volatile month ETH is trading at almost the same price. Incredible news for people who have been selling options. After last months’ article that recommended buying straddles, the Dopex team has released an atlantic straddles product. With the merge pinned less than a month from now the team has also released an ETH special vault that expires at the end of September for those wishing to play the merge.
Quick Stats (at time of writing)
- Price: $1,621
- Marked cap: $195,307,563,997
- Circulating supply: 120,192,066 ETH
Tokenomics
ETH is the utility token for the Ethereum network. All interactions with the Ethereum network must be paid for with ETH. This makes it an essential building block for the infrastructure of crypto and DeFi. On the 15th of September the famous ETH merge will move the network from proof-of-work to proof-of-stake. This will be an important catalyst for the price of ETH. A successful or unsuccessful merge will have a huge impact on the future of how the Ethereum network functions. After this ETH will also be used to secure the network, by staking ETH to use as collateral for validating transactions.
Position & Analysis
Despite all the volatility the price of ETH has ended at roughly the same price as it was this time last month. Despite being as high as $2.000 and dropping below $1.400 the price is still around the $1.600 mark. This is great news for anyone who has been selling options into the merge, as volatility keeps the premiums high. While the main topic for ETH is still the merger it’s still uncertain what impact this will have on the price. The main consensus appears to be that the merger will be successful and that this will be good for the price, only time will tell. Given the release of the ETH special vault we’re going to focus on that for today's article.
The ETH special is a vault established especially for those looking to play the merge, like us. It’s a vault for call options that have an extra long expiry, running from the 31st of July until the 30th of September. For investors there are two options: buying or selling. Either you can deposit wrapped ETH (WETH) to use as collateral for selling call options, or you can buy the call options (also using WETH). Those who expect the price to make a huge leap after the merge could buy call options to make larger returns than holding ETH outright. But they have to pay a premium for the options regardless of whether the options settle above their strike price or not. Conversely you can sacrifice lower potential returns at the benefit of earning extra if the price doesn’t go up too much.
Given the hype around the merge and the price action we’re deciding to go against the grain on this one. Writing covered calls to people looking to gamble on the merge.
Strategy
Experienced readers of the Dopex blog know how much I love covered calls. In situations like these it’s always easy to get greedy. We imagine the merge going flawlessly and the price leaping to the sky, sending our call options into financial valhalla.
Sadly, it never goes that way and in the end the casino wins. So why not be the casino? The ETH special expires roughly two weeks after the merge takes place, this gives the market plenty of time to cool and the speculators time to cool off. With a strike price of $2.000 you would end up with a 25% profit + premiums if your options are exercised.
The great part about covered calls is that it allows you to make extra returns on your assets without outsized risks. A covered call is great for those who are bullish, but not too bullish. My prediction for the merge is bullish, but not as bullish as the speculators seem to believe. Given that the merge is happening two weeks before the vault expires that gives it plenty of time for the hype to cool off and the price to drop again.
Source: wikipedia.org
Possible Outcomes
Base Case Scenario: The base case scenario is that the merge is successful, the price of ETH moves around but doesn’t exercise your option. Allowing you to collect some premium on your ETH.
Bad Case: The worst case scenario is that the price of ETH goes above your strike price, causing you to make less profit than you would have from holding ETH outright. Alternatively, that the merge is unsuccessful and that the price of ETH goes to 0 before the option expires.
Good Case: The best case scenario is for the price of ETH to go up, but still expiring below the strike price. This allows the investor to make more money than they would have from holding the ETH outright or from buying call options.
Contact and Q&A
If you have any questions or feedback feel free to message me on twitter @BowtiedProngHrn.
I also have a free substack where I write articles helping software developers get started as web and web3 developers.
Disclosures
I currently hold ETH and DPX. This is not financial advice, I am just a stranger on the internet.
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About Dopex
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner. Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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