March 21, 2023
Introducing: Option ScalpsProduct
Note that Option Scalps are currently still in production (nearing end phases). Keep an eye on our socials for when it is released!
Greetings greetings my little beans, it has been such a long time since the CEO (Chief Education Officer, not to be confused with our incredibly handsome and intelligent Chief Executive Officer Nutoro) has had the pleasure of rubbing shoulders with the plebeians and introducing a brand new Dopex product.
“Oh? What’s that product?” I hear you ask.
Allow the CEO to show you in pictorial form (a picture is worth 1,000 (one thousand) words, so they say).
That’s right people!
Introducing: Option Scalps.
What is scalping?
Scalping is a trading strategy that involves short-time frame trades speculating on directional volatility.
Said another way:
“Me think price up shortly. Me buy low now. Me sell high later. Me profit”
Of course, positions can be taken in a long (price up) or short (price down) direction allowing traders to position themselves for either scenario. Additionally, since short time frames allow less volatility, scalpers may choose to leverage positions to amplify their returns (or, if they are incorrect in their chosen direction, their losses).
What are Option Scalps?
When our beloved intern TZ famously quoted “OpFi” with virtually zero context, Option Scalps is exactly what he meant.
Decentralized finance. Powered by options.
Let us take a look at how Option Scalps will work from a design, trader and liquidity provider perspective.
Option scalps are constructed as isolated pairs consisting of a base asset (e.g. $ETH) and quote asset (e.g. USDC) only.
When a long $ETH scalp position is opened, the trader deposits $USDC as collateral and $USDC from the $USDC pool is swapped into $ETH immediately. They will pay an option premium to the scalp liquidity pool based on their chosen time to expiration.
The amount of collateral provided determines the trader’s leverage.
For the following example, we will assume a user wants 1 $ETH exposure with $1,500 initial start price. They are providing 30 USDC collateral for 50x leverage (1,500/30 = 50) and will pay a premium upfront that depends on the duration of their scalp.
Price of $ETH increases to $1,575 at position close
The 1 $ETH will be sold for 1,575 $USDC and 1,500 $USDC is returned to the scalp liquidity pool to make liquidity providers whole. The scalper will receive the 75 $USDC excess.
Here the price of $ETH has increased by 5% (1575/1500) while the scalper receives a 250% profit (75/30). The scalper’s profit is 50x the change in $ETH’s price which is consistent with their amount of leverage.
Price of $ETH decreases to $1,485 at position close
The 1 $ETH will be sold for 1,485 $USDC and returned to the scalp liquidity pool. Since 1,500 $USDC was initially used for the scalp position, 15 $USDC will be slashed from the scalper’s collateral to make liquidity providers whole.
Here the price of $ETH has decreased by 1% (1485/1500) while the scalper suffers a 50% loss (-15/30). The scalper’s loss is 50x the change in $ETH’s price which is consistent with their amount of leverage.
Price of $ETH decreases to $1,425 at position close
While the price of $ETH is $1,425 at position close, the trader’s position will be liquidated and closed earlier to ensure that scalp liquidity providers can be made whole. At 50x leverage, the maximum drawdown possible is $30 (1500/50) giving a liquidation price of $1,470 (1500 - 30).
This means when the price of $ETH hits this price, the scalper’s $ETH will immediately be sold for $1,470 and their $30 collateral will be claimed. This allows 1,500 $USDC to be returned to the scalp liquidity pool to ensure liquidity providers are made whole.
Super simple stuff!
NOTE: The opposite process is used for short positions. In an $ETH short, for example, the trader will deposit $USDC as collateral to borrow $ETH which is immediately swapped for $USDC. If the price of $ETH decreases, the $USDC position can be closed for the original $ETH returned to the pool and the profits paid to the trader as $USDC. If the price of $ETH increases, the position can be closed with the trader's margin making up the deficit.
Using Option Scalps
Option Scalp Trader
Scalpers may select:
2. Long or short position
3. Time frame (1m, 5m, 15m, 30m, and 1hr)
4. Leverage amount (5x to 110x)
To open a position, scalpers pay a premium to the scalp liquidity providers. Subsequently, shorter time frame scalps will be cheaper to open as per the Black Scholes pricing model.
Scalpers must also post collateral which will be determined by their leverage. As shown in Design, if a trader wants to trade with 50x leverage they must post 2% (1/50) of their exposure to open their position.
Option Scalps also allow traders to close position at any time!
Scalp Liquidity Provider
Scalp Liquidity Providers may provide single-sided liquidity for a scalp pool. For an $ETH pool, they can provide $ETH, which provides liquidity for shorts, or $USDC, which provides liquidity for longs.
As opposed to standard options, the scalp liquidity pool is relatively risk-off since shortfalls are covered by liquidations and the scalper’s collateral. To reflect this, premiums are priced using the Black Scholes Model with an IV of 30.
The main risk that exists is with single large wicks that may mean collateral cannot be liquidated quickly enough to ensure liquidity providers can be made whole. Scalp Liquidity Providers are compensated for this risk with standard ATM option premiums that account for the written assets volatility. Scalp LPs may withdraw their liquidity at any time provided there is liquidity unutulized.
Since scalp positions may be closed by traders at any time, utilization may even exceed 100% translating into more premiums earned!
Additional CEO musings
If you are asking yourself “why would I LP for Dopex scalps” as opposed to somewhere else there are two major benefits:
1. Risk-minimized: Profit is paid from relative appreciation of swapped asset which means LP collateral does not get slashed
2. Amplified utilization: Since scalp positions may be closed by traders, utilization may exceed 100% resulting in even more premiums earned.
If instead you are a trader, you may ask yourself “why would I trade on Dopex scalps” as opposed to somewhere else there are two major benefits:
1. Cost-Efficient: Opening a 1 hour scalp position costs a flat rate of ~0.15% on position size
2. Asset Exposure: Scalps use isolated pools which means any asset that has an IV feed can be traded (looking at you my dear $ARB)
The team at Dopex Pty Ltd. is excited to launch the next phase of OpFi with the full-scale release of our Option Scalps. As usual, if anyone has questions feel free to message 0xSaitama directly on Discord or via his twitter.
Until next time, my loyal students.
CEO (Chief Education Officer; not to be confused with CEO)
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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