LUNA - 16 March 2022
The Dopex Community Analyst series is a collection 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 the next article.**
Dopex Community Token Analysis: LUNA**
by @cryptoaioli / Ali#4813
Token & Position Introduction
LUNA is the native token of Terra, a proof-of-stake blockchain built around their algorithmic stablecoin, UST. Dopex is a decentralized options exchange available on Ethereum mainnet, Arbitrum, Avalanche, and Binance Smart Chain; let’s see if we can have some fun using LUNA and Dopex.
Disclosures
I own every asset discussed here and none of this is financial advice, purely educational. Do your own research!
Quick Stats (as of 03/02/22)
- Price: $91.56
- Circulating Supply: 374,102,813 LUNA
- Total Supply: 787,208,956 LUNA
- Market Cap: $34,293,870,761
- Fully Diluted Valuation: $72,608,505,105
Tokenomics
LUNA’s main purpose is to maintain UST’s peg. At any given time, $1 worth of LUNA can be burned to mint 1UST. There are other mechanisms in place to support this process like Anchor or treasury reserves, but the general idea is that as UST supply goes up, LUNA supply goes down and price (usually) goes up. This leads to some interesting price action in times of fear; people flock to UST to get that sweet, sweet 20% APY during bearish times and the price action of LUNA can actually stay flat or even bullish when the rest of the market looks like hot dog water.
This isn’t always the case obviously, I’ve just noticed it is more often than most other assets. Also, with any algorithmic stablecoin, there’s always the risk of depegging and some sort of black swan event leading to max pain for bulls. Remember the TITANs? Yeah, that’s always something to keep in mind, but almost impossible to predict with relative accuracy. That being said, LUNA has been in up only mode recently, it’s up over 90% in the past 10 days and it’s recently claimed the number seven spot in crypto by market cap (UST is sitting comfortably at number 15).
Strategy
This strat is mostly directed at Terra users, stakers especially (if you are farming/using LUNA it could apply just as well, it just makes more sense to stakers for reasons explained below). When Terra is ripping like it has been the past couple of weeks it makes sense to protect yourself against downside; especially in a climate as uncertain as this one. This strategy allows you to hedge against your LUNA without needing to sell or move any of it. This is especially useful if you’re farming your LUNA somewhere or have it staked due to the 21-day undelegation period. To buy puts on LUNA using Dopex, you’ll need just two assets on Arbitrum, ETH(only a couple dollars worth for fees) and 2CRV(as much as you want to use to hedge).
A married put is a relatively simple options strategy that involves buying puts on an asset alongside owning that asset itself. Traditionally, the puts purchased are done so at-the-money(ATM), meaning the strike price should be identical to the price of the underlying asset. Unfortunately we don’t have that strike price as an option anywhere, but Dopex’s closest strike is $60. This is a bit better for us since it protects us against extreme downside (<60$ LUNA price) without charging us too much for the premium. If we were to purchase a put ATM, we’d end up losing more profit to the upside but being protected from less significant downside (<80 LUNA price).
Before we look at our profit curves for this strategy, we need to understand one key difference between Dopex options and traditional stock options. In tradfi, a put option is the right to sell 100 shares of a given security at the strike price at expiry. In Dopex, a put option is the right to sell one token of a given security at the strike price at expiry. This allows for more accurate sizing when buying puts, since the premium you’re paying significantly less when you’re dealing with only one token per put contract. In addition, there is currently no secondary market for LUNA puts on Dopex, so this strategy will deal with simply buying and holding the puts until expiry.
I put together a quick married puts profit-and-loss (PnL) calculator on Google Sheets. If you plan on implementing this strategy or you’re just curious to learn more, feel free to make a copy of the sheet and plug in numbers for yourself. Let’s look at a basic example, LUNA is currently trading at about $80 while the $60 put option is trading at $1.74 on Dopex. If we currently have 1 LUNA and we buy 1 put to hedge against it, we end up with a profit curve that looks like this:
- Best case scenario: LUNA moons and you’re okay with losing almost 2% of your initial investment as a hedge
- Also a pretty good case scenario: LUNA goes to almost zero and you get to buy it back for cheaper with almost three-quarters of your initial investment.
- Worst case scenario: You lost about 26.6% of your initial investment regardless of how low LUNA goes.
Buying one put per token will always look like the graph above; your upside will always lose the premium you paid for the option while your profit/loss will be flat about 25% the current price. Hopefully buy now you can see how this can be changed to adjust your strategy, but a general rule of thumb is that a # of tokens: # of puts ratio of 1 gets you flat downside below your strike, greater than 1 gets you less protection to the downside but less premium taken out of your upside, while less than 1 gets you more upside the lower LUNA goes but the highest premiums taken out of your upside.
As Dopex grows, not only will they offer more strike prices, but they’ll offer them on more assets as well, so this is something to keep an eye on if you’re interested in a more exact strategy for different assets. This strategy is also in no way limited to LUNA, any asset that you own that is available on Dopex that you don’t necessarily want to sell during times of uncertainty is a great start. It’s easy to be long when you’re in crypto; hedging is an idea that is rarely used by smaller accounts - Dopex allows us to hedge against our assets with ease. A fiscally sound option in an industry where assets wildly swing in price and rug left and right. I haven’t decided if this is 200 or 20 IQ, maybe it’s a bit of both? Only one way to find out, happy hunting folks.
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