The Calculator Guy

The Calculator Guy



A friend recently told me my Twitter is growing faster than my here's a thread on options in DeFi. ๐Ÿงต

1/x The most common type of DeFi Options are vaults for Cash-Secured-Puts (CSPs) or Covered-Calls (CCs) Vaults take investors' staked assets & sell CSPs & CCs against those assets @ a "safe" strike price, then distribute premium generated by the options as APY to investors

2/x A CC is where an investor sells the right to buy their asset at a strike price. E.g. You can sell the right to buy your ETH at $3200 Friday for $14.81/ETH. If ETH is >$3200 on Fri, you sell the ETH and keep the premium. If it's <$3200, you keep your ETH and the premium.

3/x A CSP is the opposite. Investors are paid to commit to purchasing an asset at a certain price E.g., You can earn $33 for every $2900 committed to buy ETH. If price is <$2900 on Fri, you purchase ETH @ $2900 & keep the premium. If it's >$2900 you keep premium & your $2900

4/x BUT in DeFi, virtually all options are "cash settled" and not "physically settled." Now, settlement only applies to options that expire "in the money" (ITM). In the money means that you would have had to buy or sell your assets because the were within the strike price.

5/x W/ physical settlement, a cash secured put buys the asset and a covered call sells the asset. W/ cash settlement, you would simply lose a portion of your staked assets proportionate to the loss you would have incurred through physical settlement.

6/x For example: If you sold a CSP for ETH at a strike of $2900 and the price was $2850 at expiry, you would be at -$50 (not counting premium). This is really important to understand with DeFi Options.

7/x The other important thing to know is when you get yield. With Thetanuts, e.g., you can deposit funds @ anytime, but you won't get a yield until the next epoch starts. This means you may suffer an opportunity cost (in this case) from pulling your UST out of anchor, e.g.,

8/x Conversely, if you don't deposit into the vault soon enough, it may fill up, and you might miss out on the opportunity to participate in the yield.

9/x Ultimately, these are interesting opportunities w/ some risk. Looking @ available analytics is a great way to judge risk before you trust a protocol to determine the best strikes for their vaults. That said, virtually all of them use the same strikes and they rarely hit.

10/x Finally, most of these protocols actually outsource their options buying to other protocols (PsyOps and Ribbon, e.g.,) and you can occasionally go straight to the source for the best analytics and yields. Good luck, and trade wisely!

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