Stake DAO has launched its first Active ETH Options Strategy, a vault giving anyone a hands-off way to earn reliably competitive yields on their ETH!
In traditional finance, options are used to generate reliable returns across all types of market profiles, and yet they remain heavily under-utilized in Decentralized Finance. Using Opyn’s options protocol, we have created an automated strategy that abstracts away the complexity of options, and offers users an easy way to enjoy sustainably competitive yields on their ETH.
How does the strategy work?
Firstly, the strategy generates yield on ETH deposits by automatically selling out-of-the-money call options to market makers each week, and covers its position by locking the equivalent ETH collateral, a process known as a ‘covered call strategy’. In return for selling or ‘writing’ the options, the strategy receives a premium — the amount market makers must pay for purchasing a call. These premiums are added into the strategy and compounded, producing an annual percentage yield. The goal for the Stake DAO ETH Covered Call Strategy is for the options sold each week to expire worthless, allowing depositors to earn juicy option premiums while maintaining ETH upside.
Behind the scenes, this portion of the strategy is powered by Opyn Finance, a leading options protocol that has been audited by OpenZeppelin, Trail of Bits, Peckshield, and formally verified by Certora. Opyn’s Head of Marketing and Community, Wade, commented on the integration:
“Opyn is protocol-first and it was awesome to support the Stake DAO team build using perpetual vault templates from Opyn’s developer toolkit! The Active ETH Options Strategy creates a simple, easy way for the Stake DAO community to earn high yield. Structured products using options are starting to explode in DeFi and we’re excited to watch the space grow even more!”
One week, the strategy sells call options for 1000 ETH with a strike price of $4,000, when at the time ETH is trading at $3,150. The premium that buyers pay for the options is 0.7% (in this case, 7 ETH). At time of expiry, ETH is trading at $3,500, and the options are “out-of-the-money.” This week, the strategy has earned 0.7% yield (36% APY).
The next week, the strategy sells call options for 1,007 ETH with a strike price of $4,500, when ETH is trading at $3,500, and receives an additional 7 ETH premium (0.7%). At time of expiry, ETH is trading at $4,700, and the options are “in-the-money”. This week, the strategy needs to pay its counterparties (market makers) with the difference between the settlement price at expiry and the strike price. In this case, it pays 1,007 x (4,700–4,500)/4,700 = 43 ETH (-4.3% return). The total return for the strat during this week is therefore 7–43 = — 36 ETH (-3.6%). However, the user is not at loss during this week, as his position benefitted from the ETH price increase and the premium earned.. In USD terms, the strategy value increased from 1,007 x $3,500 = $3,524,500 to (1,007–36) x $4,700 = $4,563,700, representing a 29% increase.
In other terms, the strategy gives away the upside potential above the strike price against a yield.
Totaling the strategy’s weekly returns over the course of 52 weeks, similar strategies have yielded between 10% and 20% per annum. This figure is only one half of the strategy’s yield mechanism, read on to see how the strategy produces almost double this figure!
How does the strategy generate additional yield? What is the APY?
To make our Active ETH Options Strategy as competitive as possible, we have worked with the Opyn Finance team to have our Passive ETH Strategy contract whitelisted on Opyn as collateral. This enables all ETH deposited in Active ETH Strategy to earn both the yield generated from options writing, as well as the full yield accumulated on deposits in the Passive ETH Strategy.
In practice, the APY generated from the strategy is: (Weekly Options-writing yield *52 weeks) + Passive ETH APY. Based on current rates and strategy deposits, Annual Percentage Yield on the Active ETH Options Strategy could exceed 20% APY at launch.
What are the risks of using the strategy?
The main risk for users deposited into the Active ETH Options Strategy vault is if the call options expire in the money (the price of ETH is above the option strike price at expiry), resulting in a loss for the week. In the event that the options expire in-the-money, the loss is equal to the difference between the strike price and the settlement price. Stake DAO employs conservative risk-management to strike price selection with the plain objective of avoiding losses, and keeping the strategy as profitable as possible.
Please note, the strategy may incur slippage when you deposit or withdraw ETH, as your ETH is used to deposit or withdraw liquidity on the Curve sETH-ETH pool. Depending on the imbalance in the pool, the slippage can work in or against your favor. We ensure that you won’t face more than 0.2% slippage when you deposit on our front end.
As with all Stake DAO strategies, there is a risk of smart contract failure in the underlying vault — in this case, the Curve Finance sETH pool and the Opyn contracts.
Terms and Definitions:
- Call Option: A call option is a financial contract that gives the option buyer the right, but not the obligation, to buy an asset at a specified price for a specific amount of time.
- Option Buyer: The person who buys an option by paying a premium. This person has the right, but not the obligation, to exercise the option. Also known as an options “holder,” or someone who is “long” an option.
- Option Seller: The person who sells an option in return for a premium. The option seller is obligated to perform when the buyer exercises their right under the option contract.
- Collateral: Collateral refers to an asset held as security by the options seller in order to hedge the credit risk of the options transaction, for example ETH.
- Underlying: The underlying asset on which an option’s value is based (e.g. ETH). It is the primary component of how an option gets its value. Options are classed as derivatives because they derive their value from the performance or price action of an underlying asset.
- Premium: The money paid upfront by the option buyers to the option sellers in return. It is the cost of the option.
- Strike Price: A strike price is the set price at which an options contract can be bought or sold when it is exercised. For call options, the strike price is the price an asset can be bought.
- Expiration date: The date when the options contract becomes void. For European options, it’s the due date for options buyers to exercise the options contract.
- Exercise: To exercise means to put into effect the right to buy the underlying asset at the strike price. If the holder of a call option exercises, they will buy the underlying asset.
- At The Money (ATM): A call option is at-the-money when its strike price is the same as the current underlying asset price.
- In The Money (ITM): Refers to an option that possesses intrinsic value. A call contract is in the money when its strike price is less than the current underlying asset price.
- Out of The Money (OTM): An option that only contains extrinsic value. A call option is out of the money when its strike price is greater than the current underlying asset price.
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