Hello Anon, gm, let us talk about Single Staking Put Option Vaults (aka SSOV-p) and strategies the users may use.
Let us kick-off with an overview, and keep the format similar to previous SSOV guides.
Overview:
- What is SSOV-p
- What can I do as a put writer? What is my risk, what is my potential profit?
- What can I do as a put option buyer? What is my risk and potential profit here?
- Use cases
Disclaimer:
Remember Anon, this is not financial advice nor a recommendation and you should always determine your risk tolerance, your strategy, investment horizon and all other factors that will impact your investment decisions. This article presents a few hypothetical use cases to improve your understanding of how the product may work.
The Abstract
- SSOV-p:
- Lock your stablecoins in a vault for an epoch.
- Choose from a set of predetermined put option strikes.
- The vault will use collateral for farming, while offering the puts you chose to write to on-chain buyers.
- The profit and losses will be net settled in stablecoins at the end of the epoch.
- As a Writer:
- For speculators - you can try boosting your stablecoin APR%, while onboarding additional risk, by trying to sell puts with strikes you expect will expire out of the money.
- For long-term token bulls - you can use put writing as limit buy orders that will also farm and earn yield.
- As an Option Buyer:
- Make an asymmetric bet on the price of the token in the future, with potentially high PNL.
- Use put options as a form of an insurance - protect against unexpected dips and drawdowns.
- Pay a premium upfront to purchase an European-type put option.
- If the option is in-the-money at the expiry - receive profits.
- Otherwise - your initial investment is lost.
What is SSOV-p?
SSOV-p is an abbreviation for “Single Staking Put Option Vault”. If you are not familiar with SSOV concepts, read these articles first:
📕 https://blog.dopex.io/articles/ssov/dopex-ssov-strategies
📗 https://blog.dopex.io/articles/ssov/dopex-single-staking-option-vaults-ssov
In short, the SSOV-p are vaults made to match the put option writers (users that will deposit stablecoins and agree to sell options at chosen strikes) and put option buyers. The vault will deposit all the collateral in farms, to earn yield for the depositors. Whenever any user would like to buy an option, the vault will calculate the live price, that will reflect the market conditions (volatility, spot and strike prices and time to expiry).
To sum up, there will be two sides to the SSOV-p:
- The Option Writers (Stakers)
- The Option Buyers
What will the Option Writers do?
The Option Writers will have to determine the put option strikes they would be happy to offer and would need to post the stablecoin collateral.
The put options will be fully collateralized - i.e. an option with a strike of 100 USD would need 100 USD in stablecoins, while an option with a strike of 3000 USD would need 3000 USD in stablecoins. The users will be able to write options for one token, multiple of tokens or fraction of tokens - i.e. regardless if they deposit 10 USD or 100 000 USD in stablecoins, the vault would allow them to participate.
The stablecoin collateral will be locked for an epoch (ca. 1 month). The stablecoins can’t be withdrawn until the epoch ends, remember! In return, the Option Writers will collect a premium for selling options. At the same time, all the collateral will be deployed in trusted stablecoin protocols such as Curve, to farm additional yield.
To sum up - Option Writers are locking their collateral, collecting premiums from selling put options, while the collateral is earning additional yield in Curve.
Now, the most important point - writing put options means being exposed to a market risk - as in, if options expire in the money, the portion of the collateral deposited (equal to a loss) will be moved to the option buyers.
What will the Option Buyers do?
Option Buyers will be able to buy the put options during the epoch and pay a premium. The premium will be paid to the Option Writers. The options are European - which means they can be exercised only at the time of expiry. If at the expiry, the options are in the money, the Option Buyers will profit at the cost of the Writers. If the options are out of the money - the Option Buyers lose what they paid - this money stays with the Writers.
At the first sight, being the Option Buyer may seem as an all-or-nothing play, quite degen. Let’s think about it - if the spot moves against the Buyer, the whole initial investment is lost. However, if the market moves in favor, the Buyer would overperform holding spot assets.
But is speculation the only usage for Option Buyers? Absolutely not - the put options are quite popular as a portfolio insurance against large price drops. Are you holding significant amount of tokens and are you afraid of large price drops? You may limit your worst case scenario with put options - i.e. if you buy a put option at 25% below the market price, this will be your “insured” or “worst case” level. Even if the market drops 50%, you will be able to sell your tokens only at the 25% drawdown. These numbers are of course just examples - the choice is up to the Buyer.
Can we have some examples, please?
Let’s go through a few sample scenarios. Let’s assume ETH spot at 3000 USD.
- Buying puts as a speculation or as an insurance:
- Option Buyer expects the market to go down, to ca. 2200 USD per ETH.
- Uses SSOV-p, buys an option with a strike of 2500 USD per ETH, pays 60 USD as premium.
- The option buyer will be in the money as long as spot < strike.
- If at the expiry, the price is 2200 USD, as the user expected, the net profit is 2500-2200-60 = 240 USD.
- Writing puts as a speculation:
- Options seller wants to farm in the Curve pools with his stables and wants to have his yield boosted - but at a risk.
- They expect that ETH won’t be at 2500 USD or lower by the end of the month.
- They deposit 2500 USD to SSOV-p.
- The vault keeps farming with that 2500 USD, also if the put options are sold, the writer collects a premium.
- If the user was right and ETH was above 2500 USD at the option expiry, they would keep all the premiums + farming yield.
- Otherwise, they need to settle the PnL with the option buyer
- Writing puts as a yield-farming buy order:
- Options seller keeps some stables on the side to buy the dips. They use these stables to farm in the Curve pools.
- The options seller would be happy to buy an ETH dip at 2500 USD or lower at the end of the month.
- They deposit 2500 USD to SSOV-p.
- The vault keeps farming with that 2500 USD, also if the put options are sold, the writer collects a premium.
- If at the expiry, ETH is above 2500 USD, they keep their stables (+ premium and farming yield).
- If ETH is below 2500 USD, the PnL is marked to market and settled as if they bought ETH at 2500 (but they keep the premiums and yield). They now proceed to withdraw the stables from SSOV-p and buy ETH on the market.
What are some other ways to use puts?
You can use puts for many other things - think about them as DeFi building blocks. You can pair them with call options to take more advanced bets (for example buy both puts and calls if you think the market will move by a lot, but you are not sure in which direction), or you can write both calls and puts if you expect a crab season.
You can mix buying and selling calls and puts to create caps and floors on your profits and losses and many more.
Enjoy the ride, Anon!
💡 Jump into our Discord to discuss different strategies and share ideas with fellow anons: Discord.gg/dopex.
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