January 24, 2023

Atlantic Perp Protection - Buyer Side

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Atlantic Options: Buyer-Side

Atlantic Perp Protection is an option product that provides liquidation protection to leveraged traders on GMX. This allows them to keep their trading position open even if the mark price of their target asset falls below their liquidation price, the point where a trader’s margin is zero and their position should be automatically closed.
This post will go through the purchase of Atlantic Puts (AP), the use of AP collateral for liquidation protection, and the unwinding process for settlement of options. It should be noted that traders cannot purchase APs directly. Rather, purchase of APs are conducted via Dopex Managed Contracts. Since Atlantics allow for no-collateral borrowing, operating via a managed contract ensures the AP writer’s collateral will always be present at expiration of the option.

customPurchase of APs

The two input parameters for the purchase of any type of option is Strike Price and Number of Options Purchased. For APs, these parameters are automatically generated based on Liquidation Price and Position Size. AP expirations are set to weekly epochs and must be repurchased if a trader wants to maintain liquidation protection.
Strike Price
The Strike Price of APs to be purchased is determined by the position’s liquidation price rounded up to the nearest tick (with a small buffer). When you use higher leverage, your liquidation price will increase, meaning higher strike puts will need to be purchased.
Example 1
Let’s pretend a trader takes out a leveraged long on ETH with an entry price of $1,500. Let’s also pretend the tick sizes on Dopex APs are currently $100.
At 10x leverage, the trader’s liquidation price is $1,350. Since tick sizes are $100, the strike of the APs purchased must be $1,400.
At 5x leverage, the trader’s liquidation price is $1,200. Although a strike price of $1,200 satisfies the tick size requirement, a strike price of $1,300 will be purchased to create a sufficient buffer between liquidation price and AP strike.
Number of Options Purchased
The Number of Options Purchased is determined by a trader’s position size, which is the product of their Initial Margin and Leverage used. The liquidation protection mechanism works by deleveraging a user’s position to a leverage of 1 (i.e. completely de-leveraged). This means the entire value of their Position Size less their Initial Margin must be available to borrow from the collateral of their APs purchased.
Example 2
Using Example 1, let’s pretend that the Initial Margin was $1,500 and Leverage used is 10x. This will give a Position Size of $15,000 (Margin * Leverage).
The amount of collateral that must be accessible from APs purchased is $13,500 (Position Size – Initial Margin) to allow their position to be fully de-leveraged. We know from Example 1 that at a $1,500 Entry Price and 10x leverage, the APs purchased must have a $1,400 strike price which are each collateralized by exactly $1,400.
This means the trader must purchase 9.64 (Collateral AccessibleCollateral per AP) $1,400 strike APs to have sufficient collateral to allow their position to be fully deleveraged.

Liquidation Protection

A leveraged position is said to be liquidated if the mark price is equal to the Liquidation Price. Since Liquidation Price is a function of Leverage, decreasing Leverage will also decrease Liquidation Price which allows the price of an asset to decrease by a larger amount before a position is liquidated. If Leverage is decreased to 1 (i.e. fully unleveraged), the liquidation price decreases to zero (not considering fees) which means that the position cannot be liquidated – this is the basic principle for Dopex’s AP Liquidation Protection.
In Purchase of APs above, you will note that the Number of Options Purchased is specifically chosen so that the amount of collateral borrowable from APs purchased plus the initial margin is exactly equal to the trader’s position size (Initial Margin + Collateral Borrowable = Position Size). By fully borrowing the collateral from the AP and depositing it into the trader’s margin account when protection is purchased, the margin amount will exactly equal their position size. Said another way, the trader’s leverage is now just 1x!

Profit and Loss from your Perpetual and Option Positions

Now as a GMX leveraged trader who has their perp position protected by APs, you might be wondering to yourself “What happens when the options expire or I want to close my position?”
To best understand this, there are 3 critical questions the trader should ask themselves:
1. What is the PnL of my ETH Long position?
2. What is the PnL of my ETH Atlantic Put position?
3. Has collateral been borrowed from the AP for liquidation protection?
Let’s go through a few examples with different prices of ETH. Please note that the numbers we are using are intentionally rounded to give a conceptual understanding of the process so actual numbers may deviate slightly.

Setting the Scene

For the following cases, we are assuming that we have a 10x ETH long trader with an entry price of $1,000 and AP Strike Prices of $900. In the below diagram, the ETH long position is represented by the blue line whilst the AP position is overlaid with the red line.
customNote that there are 3 position ranges that are possible:
1. End ETH Price > Start ETH Price
2. Strike Price < End ETH Price < Start ETH Price
3. End ETH Price < Strike Price
Let’s go through each of these in more detail!

A) End ETH Price > Start ETH Price

This section is represented by the Green Triangle in the graph above.
Let’s answer our 3 key questions:
1. What is the PnL of my ETH Long Position? % Change from ETH Entry Price * Position Size
2. What is the PnL of my ETH AP Position? Zero, the strike price has not been hit
3. Has collateral been borrowed from the AP for liquidation protection? No, the strike price has not been hit
This scenario is straightforward. Your ETH long position can be closed at a profit whilst your AP position is OTM meaning no settlement is required.

B) Strike Price < End ETH Price < Start ETH Price

This section is represented by the Pink Triangle in the section above.
Let’s answer our 3 key questions:
1. What is the PnL of my ETH Long Position? % Change from ETH Entry Price * Position Size
2. What is the PnL of my ETH AP Position? Zero, the strike price has not been hit
3. Has collateral been borrowed from the AP for liquidation protection? No, the strike price has not been hit
This scenario is also straightforward. Your ETH long position can be closed at a loss whilst your AP position is OTM meaning no settlement is required. Note that the maximum loss from your ETH long position is the full value of your Initial Margin; technically the point where your position should be liquidated. However, since your position is fully deleveraged using borrowed AP collateral, liquidation cannot occur.

C) End ETH Price < Strike Price

Now the two examples above are very straight forward; since the AP is OTM, the only PnL from the trader’s position is derived from their ETH long payoff.
But what happens if the Strike Price is hit and the options expire ITM? Let’s answer our 3 key questions again:
1. What is the PnL of my ETH Long Position? % Change from ETH Entry Price * Position Size
2. What is the PnL of my ETH AP Position? (Strike Price - End ETH Price) * Options Purchased 
3. Has collateral been borrowed from the AP for liquidation protection? Yes, the AP collateral has been fully moved into the GMX contracts to deleverage my position
Here something interesting happens.
The PnL of your ETH long position below your Strike Price is fully offset by the PnL from your AP position, giving a PnL for this section of zero.
This means that the maximum amount the trader can lose is the Initial Margin, which is represented by the above scenario B) Strike Price < End ETH Price < Start ETH Price. This means regardless of how poorly your trade goes, the maximum amount you can lose is still your Initial Margin since ETH prices below strike prices means your AP payoff will pay for your ETH long losses and more importantly your long position can be kept open, letting you fight for another day!
Incredible!

Settling your Options

Now let’s say you are happy (or sad) with your leveraged trading adventure and wish to close your AP position - the way you need to proceed depends on whether your APs have been activated (i.e. strike price has been hit and collateral has been moved from AP to GMX contracts).
For both **A) End ETH Price > Start ETH Price **and B) Strike Price < End ETH Price < Start ETH Price, the process is trivial. Since the AP is not ITM and collateral is still in the Dopex AP contracts, you can close your position as usual with whatever profit or loss your perp position carries whilst the APs expire worthless.
For C) End ETH Price < Strike Price, since your APs are ITM and collateral has been borrowed, this is where things get a little trickier depending on whether you want to keep your perpetual long position open or close it entirely. The following two scenarios will go through ITM APs depending on whether the trader wishes to close or keep their position open.

Closing your Long Position

If you want to close your position from C) End ETH Price < Strike Price, it is important to keep in mind that the *Strike Price *is assigned to be barely higher than your Liquidation Price. For simplicity’s sake, let’s treat these prices as equal.
From the above discussion in B) Strike Price < End ETH Price < Start ETH Price, we know that the maximum loss the trader can have is limited to the value of their Initial Margin. This is because with any decreases to ETH price below Strike Price, the loss from the long is offset by the payout from the AP.
This means that if you close your position whilst C) End ETH Price < Strike Price, you will lose your initial margin and will not realize settlement from AP profits since they are used to offset the losses from the long position.

Keeping your Long Position Open

In C) End ETH Price < Strike Price, the only thing preventing your position from liquidation is the AP collateral that has moved into your GMX margin account to fully deleverage your position. Now what if you want to close your AP position (or if your AP position is going to expire) but you want to keep your long position open?
For this to happen, two things must occur:
1. AP Collateral must be returned to AP writers to make them whole (less settlement)
2. GMX Collateral must be maintained to prevent liquidation
In C) End ETH Price < Strike Price APs are considered ITM, meaning the trader should have the option to sell the underlying (ETH) for the Strike Price. The way APs are designed, traders have the option to deposit Options Purchased * Underlying in exchange for the collateral that has been borrowed. The outcome from this is that the Trader (Option Buyer) has sold ETH (The Underlying) to the AP Writer at the Strike Price which will satisfy the conditions of the option contract!
Said another way, AP writers receive their collateral back in the form of the underlying (rather than the original stablecoin deposit) whilst the trader can keep their long position open since they now own the stablecoin collateral within their GMX margin account. In this way, both of the required events have occurred:
1. AP Collateral has been returned in the form of the underlying
2. GMX Collateral has been been ‘purchased’ by the trader using the underlying allowing the GMX long position to be kept open

Fees

Atlantic Perp Protection will pay the following fees which are paid at the time protection is purchased.:

GMX Fees

Swap fees are paid to GMX for swapping the user’s collateral into the underlying.
Position fees are charged at 0.1% of Position Size and paid to GMX.

Option Writer Fees

Premiums are paid to option writers to purchase APs. The fees depend on the amount of options purchased and selected strike prices which are determined by position size and leverage used.
Borrowing costs are paid to option writers to utilize underlying AP collateral. The fees are calculated based on [Borrowed Collateral * Borrowing Cost * Duration Borrowed].

Dopex Fees

Strategy fees are charged at 0.5% of Position Size and paid to veDPX holders.
Strategy fees can be reduced by up to 25% by holding:
  • veDPX - 1% discount per veDPX
  • Bridgoor - 2.5% discount per Bridgoor
  • Halloweenie - 25% discount
Incredible - a lovely succinct little article about how you, a silly bean horrible leveraged trader (unlike the CEO) can protect their position fully from liquidation!
As per usual, if there are any queries feel free to ask any of our helpful Employees on the Discord below and they can walk you through the process (feel free to DM @0xSaitama directly kekLMAO)
Until next time, my loyal students.
CEO (Chief Education Officer, not to be confused with Nutoro, our Chief Executive Officer)
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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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