Simplified, supercharged yield with Stake DAO Options Strategies
Stake DAO Options Strategies are currently offering higher yields than many traditional yield farming strategies, giving anyone the opportunity to earn competitive returns on Ether, Wrapped Bitcoin, and stablecoins. All the complexities of options are removed — all users have to do is deposit in a single step!
Having seen an uptick of TVL (+50%) in the last couple of weeks across options strategies, we thought it was time to welcome new, existing, and prospective users with a quick guide so you can not only get the most out of them, but understand how they work.
A quick primer on options
As far as DeFi goes, the concept of yield from options is a relatively new one, but it’s one we’re confident will be a big part of the landscape as time goes on. First let’s make a few definitions, as not everyone is familiar with how options work.
Call option contracts give their buyers the right to buy an asset at an agreed-upon price (the ‘strike price’). If the spot price is higher than the strike price at time of contract expiry, then the buyer gets to keep the difference as profit.
If Bob buys one ETH call option with a strike price of $5000 and on Friday at expiry ETH is trading at $5500, then he’s made $500 profit. If ETH is trading lower than $5000, then the option expires worthless.
Put option contracts give their buyers the right to sell an asset at an agreed-upon price (the ‘strike price’). If the spot price is lower than the strike price at expiry, then the buyer gets to keep the difference as profit.
If Samantha buys one ETH put option with a strike price of $4000 and on Friday at expiry ETH is trading at $3600, then she’s made $400 profit. If ETH is trading higher than $4000, then the option expires worthless.
So how do Stake DAO Options Strategies generate yield?
In exchange for being able to speculate on assets with options, buyers of calls and puts pay a premium — a small percentage of the total value of their option contract. These premiums fluctuate depending on the time until expiry, volatility, and the price of the asset at time of sale. This is where our strategies come into the picture!
By selling call or put options to market makers each week, Stake DAO Options Strategies receive the premiums paid by options buyers. These get added in and compounded, producing an Annual Percentage Yield (APY), all done via the Opyn Finance decentralized options protocol, who work closely with Stake DAO on all options strategies.
That’s not all though! To make the strategies as productive as possible, all the collateral held in the vaults also earns yield from Stake DAO Passive yield strategies (Passive USD, Passive ETH, Passive BTC). This is called ‘working collateral.’
Note: See ‘What are the risks?’ to learn about potential vault losses.
ETH & BTC Covered Call Strategies
In simple terms, the ETH and BTC Covered Call Strategies are an easy way for anyone that wants to hold Ether or Bitcoin for the mid to long-term while earning some of the market’s best yields. This strategy is ideal for flat, declining, and moderately rising market conditions.
The objective is for the options to expire below the strike price each week, meaning users get to keep all the premiums, working collateral yield, and 100% of collateral. To achieve this, the strategies employ financial modeling in strike price selection, optimising for maximum premium size and minimum risk.
Note: To receive additional ~8% in SDT rewards on top of the strategy’s native ETH or BTC yield, you can stake your LP tokens in LP Farming (instructions here).
So what are the risks?
The main risk is that the options expire ‘in the money,’ meaning the price of ETH or BTC is higher than strike price at time of expiry on Friday.
In this case, the vault will give up the price gain above strike price — this goes to the buyer of the option contract. In this scenario, the vault could have a small loss of collateral for the week. To compensate for this, the strategies aim to target a very high APY, so that any negative weeks don’t impact the overall yield too much!
It should also be noted that even in negative weeks, the strategies still get to keep the premium and the working collateral yield.
Also be aware, the strategy may incur slippage when you deposit USD stable coins, as your tokens are used to deposit liquidity on the Curve pool. Depending on the imbalance in the pool, the slippage can work in or against your favor. To avoid this difficulty, you also have the possibility to deposit directly with Curve LP tokens.
Finally as with all Stake DAO strategies, there is a risk of smart contract failure in the underlying vault.
ETH Put Selling Strategy (stablecoin collateral)
As the name suggests, this strategy generates yield by selling ETH puts, but the beauty of it is that all collateral and yield is denominated in stablecoins, and users never have to touch ETH! By taking advantage of ETH’s volatility, this strategy can offer extremely competitive yields on stablecoins.
This strategy is ideal for flat, up, and moderately falling market conditions — the best-case scenario is for ETH to stay in consolidation or to rise. Just like our Covered Call Strategies, the ETH Put Selling Strategy will keep 100% of premiums and collateral as long as the options expire ‘out of the money.’ Since put options are the reverse of calls, this means that the price of ETH should be higher than the strike price at time of expiry.
What are the risks?
Just like our Covered Call Strategies, the main risk is that the options expire ‘in the money,’ since this is a Put selling strategy, things are reversed. If the price of Ether is lower than strike at expiry, the strategy has a losing week.
In this case, the vault will give up the price gain below strike price — this goes to the buyer of the option contract. As with all Stake DAO options strategies, The ETH Put Selling Strategy will still keep the premium and the working collateral yield. Finally as with all Stake DAO strategies, there is a risk of smart contract failure in the underlying vault.
To see historical performance, vault capacity, and more, check out our Options strategies here!
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