The latest Stake DAO option strategy is live with the ETH Put Selling Strategy!

With the Herd’s voracious appetite for our first two Covered Call strategies on ETH and BTC (pushing us to up the cap multiple times on each), we do believe it’s time to up the ante and dish up even more ways to earn outsized yields using options!

Today, Stake DAO launches the ETH Put Selling Strategy, a high-yield vault selling ETH put options and growing the collateral via the Curve Frax pool to unlock some of the market’s highest APYs (see risks of strategy below).

What is the aim of the Strategy?

The aim of the ETH Put Selling Strategy is to generate outsized yields by selling ETH put options, collateralized by LP tokens of Stake DAO’s Passive Frax strategy (sdFRAX3CRV), and reinvesting the yield it earns back into the strategy, effectively compounding the yields for depositors over time.

Users may deposit either Curve LP tokens (FRAX3CRV), or stable coins including FRAX, USDT, DAI, USDC.

What market conditions is it suited to?

The strategy is ideal in flat, upwards-trending, and moderately declining market conditions, with the best-case scenario being when ETH is consolidating or rising. If the options expire out-of-the-money, vault depositors earn yield from option premiums and keep 100% of their FRAX collateral.

How does the Strategy work?

1. User deposits FRAX, FRAX3CRV, DAI, USDC or USDT in the ETH Put Selling Put Selling Strategy vault. Deposits are autostaked in the sdFRAX vault.

2. Models are run to determine the optimal strike price for the WETH put options. The algorithm selects a strike price low enough so that with reasonable market movements, the options will expire worthless and vault depositors keep 100% of their underlying collateral. As for other Stake DAO option strategies, the risk level targeted by the strategy will be reflected by the delta factor of options sold. A -0.1 delta will be targeted when selling put options.

3. Vault mints ETH put options. Every Friday at 11 am UTC, the vault mints European WETH put options by depositing its FRAX balance as collateral in an Opyn vault. The vault sets the strike price to the expiry date to the following Friday. In return, the vault receives oTokens from the Opyn vault, each of which represents a WETH put option.

4. Vault sells options via Airswap to whitelisted market makers. On Friday evening, an auction is performed with a list of whitelisted market makers. The highest bid will win the auction and the transaction will be performed via Airswap.

5. At expiry, every Friday 8 am UTC, an oracle sets the expiry price. A 2-hour dispute period allows for a potential claim over the oracle price. If the option is in the money (ETH expires above the strike price), nothing happens. If the option expires in the money (ETH expires below the strike price), the strategy pays the market maker with the difference between the expiry price and the strike price. Therefore, the breakeven ETH price for weekly rewards is always:

ETH breakeven: Strike Price — Premium — weekly return of Passive Frax strat. — Farmed SDT

How does the strategy generate additional yield? What is the APY?

Just like our ETH and BTC Covered Call strategies, the ETH Put Selling Strategy receives three streams of yield: the yield generated from options writing, the yield accumulated on deposits in the Passive FRAX Strategy, and additional SDT incentives.

In practice, the APR generated from the strategy is: (Weekly Options-writing yield *52 weeks) + Passive FRAX APR + SDT incentives APR. Based on current rates and strategy deposits, APR on the FRAX ETH Put Selling Options Strategy should exceed 90%.

What are the risks?

The main risk for users deposited into the ETH Put Selling Strategy vault is if the put options expire in the money (the price of ETH is below 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 USD stable coins, as your tokens are used to deposit liquidity on the Curve Frax pool. Depending on the imbalance in the pool, the slippage can work in or against your favour. To avoid this difficulty, you also have the possibility to deposit directly with Curve LP tokens (FRAX3CRV).

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.

Stay safe, and enjoy!

Terms and Definitions:

  • Put Option: a put option is a financial contract that gives the option buyer the right, but not the obligation, to sell 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 put options, the strike price is the price an asset can be sold.
  • 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 put option exercises, they will sell the underlying asset.
  • At The Money (ATM): A put 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 put contract is in the money when its strike price is higher than the current underlying asset price.
  • Out of The Money (OTM): An option that only contains extrinsic value. A put option is out of the money when its strike price is less than the current underlying asset price.

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