May 26, 2022

IRO Strategies: Intern Halko's Curve x IRO Strategy

It is a day for a day and on this day we shall be going through the Interest Rate Option (IRO) strategy outlined by our dear intern Halko in his recent(ish) twitter thread.
Interesting… very interesting intern Halko.
Now how does this strategy work? We will start with the basics, see what so-called “Dopex” can offer, and then go through a simple worked example.

The Basics

Curve is a decentralized exchange that allows users to deposit tokens and earn from transaction fees and $CRV emissions. For a quick run down, see our introductory Curve explainer.
The transaction fees and $CRV emissions for a pool are incorporated into the APY which represents the percentage return on your initial investment if you were to LP for a full year assuming transaction fees, $CRV emission, and TVL remain constant.
If you deposit $100k into a pool paying 5% APY, you would receive $5,000 over a year ($100k * 5% = $5,000).
Simple mathematics as they say.

The Dopex Tie-In

Dopex IROs allow users to buy or write (sell) call and put options in exchange for an option premium. IRO settlement is based on the APY (floating rate) of a specified Curve pool compared to the chosen strike rate with the following formulas:
If options expire in-the-money (ITM), the difference is paid from the writer’s deposit to the buyer. If they expire out-of-the-money (OTM), the writers’ deposit is returned in full. Regardless of how the option settles, buyers will pay an option premium to the writers.
Our lovely intern Halko’s strategy combines LPing on Curve with writing OTM call and put options. This creates an option strategy known as a “short strangle” with returns compared to LPing alone pictured in the following diagram.
The idea is that if the Curve APY remains relatively stable then the return is higher than LPing alone due to those juicy option premiums. If this is all the information you wanted, feel free to stop reading here. If you would like to learn how to implement this strategy, we will go through a worked example below.

The Strategy

The strategy employed in this example will use 100k in stablecoins to be allocated to a Curve pool whilst writing OTM calls and puts over a 2 week period with an initial APY of 5%. In brief, we will:
  1. Deposit $99k onto Curve
  2. Deposit $1k into a Dopex IRO SSOV and write:
    1. OTM Calls (Strike rate = 5.25%)
    2. OTM Puts (Strike rate = 4.75%)
This model will rely heavily on this spreadsheet. As usual, make a copy and input your own variables to fit your own strategy.

Deposit on Curve

The first part of the strategy is to deposit stablecoins into Curve. Whilst the initial APY is 5%, this figure may actually fluctuate during the course of your deposit.
This beautiful model outlines your return from LPing on Curve with $100k with the blue row highlighted to indicate your earnings if the APY remains constant at the initial 5%.
Whilst the strategy does say to deposit only $99k onto Curve, when you deposit $1k into the IRO SSOV the underlying asset is still earning the Curve APY. This means that using our strategy ($99k Curve + $1k IRO SSOV) compared to LPing on Curve alone results in the same return derived from Curve deposits.

Write Options

The next thing we need to work out is the value of premiums we will earn from writing our OTM options. We will be leveraging up our $1k IRO SSOV deposit 500x to give a notional value of $500k each for the calls and puts we are writing.

1. Write Call Option

The model below shows a $500k notional value of a two week call written at a strike rate of 5.25% assuming the forward rate is 5%.
You will earn $55.06 in option premiums for writing this call.

2. Write Put Option

This time the model shows a $500k notional value two week put written at a strike rate of 4.75% assuming the same forward rate.
You will earn $51.44 in option premiums for writing this put.
In total, the premium you earn for writing both calls and puts is $106.5 (55.06 + 51.44).

Option Settlement

“PnL?” asks intern TZ.
The crowd gasps in anticipation.
Ask no further as the CEO answers.
Column A outlines your floating rates. This determines both your Curve Returns (Column F) and whether the options you write expire ITM resulting in your IRO SSOV deposits being slashed (Column B and C).
You will earn the same premium (Column D) regardless of what the floating rate at settlement is since you purchase them at the beginning.
APY remains stable at 5%?
Your net return using this strategy is $298.28 compared to LPing on Curve alone which earns $191.78. Whilst this might look small, this is actually a 55% increase to your return.
Let’s pump those proverbial numbers up, Employees!


As interests deviate further from your strike prices, your deposits will be slashed which can result in a decrease to your final net return. The maximum amount your return can be slashed is by $1,000 (the value of your deposit) which requires an APY fluctuation of 6%.
Possible? Maybe. Likely? Maybe not.
DNI-YOR as they say.

Parting Poem

Wow! Can you believe that William Shakespeare wrote that? Truly a man wise beyond his years.
Until next time my loyal students.
Warm regards,
CEO (Chief Education Officer)
Not to be confused with our Chief Executive Officer, The Most Esteemed and incredibly handsome, well-built, well-hung Nutoro.

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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