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Maxi Strategy

An overview of the potential benefits and risks to participating in the Covered Put Spread Strategy

Updated over a week ago

TLDR

  • Earn yield on the underlying collateral in "trending down", sideways or bull markets

  • The vault sells out-of-the-money (OTM) put options to generate the yield.

  • It simultaneously buys further OTM put options to limit downside risk in case of a large price drop.

How does the Covered Put Spread Strategy work?

A covered put spread is a trading strategy that involves holding the underlying asset as collateral while selling put spreads against it.

The automated Covered Put Spread Strategy consist of three main components:

  1. Deposit the underlying asset as collateral into the vault.

  2. Each week, the Vault will:

    A. Sell OTM put options against it to earn yield; and

    B. Buy further OTM put options to limit the downside risk in case of a large price drop.

  3. After expiry, the Vault will either:

    A. Buy collateral - If option settlement results in a positive USDC balance.

    B. Sell collateral - If option settlement results in a negative USDC balance.

For a technical overview of how the Vault executes, please refer to the Covered Put Spread Execution article.

Why participate in the Covered Put Spread Strategy

  • The primary benefit of the Covered Put Spread Strategy is earning yield on the underlying asset by selling OTM put options (Strike K1).

  • To limit the downside risk, the strategy trades off a portion of the yield APY by also buying further OTM put options (Strike K2).

  • In the event the price drops significantly, the max capped USDC loss = max(Strike K1 - Strike K2 - net premium received, 0).

  • The strategy is best suited for holders of the underlying collateral who want to earn yield on their asset in a mildly bearish to very bullish market, while limiting the downside risk in case of a large price drop.

What are the risks of the Covered Put Spread Strategy?

  • The main risk of the Covered Put Spread Strategy is collateral conversion.

  • If the sold put spread expires ITM and the net premium received is not enough to cover the settlement loss, the Vault sells collateral to clear the USDC debt.

  • However, as mentioned before the max loss is capped in USDC terms (as described above)

  • For the implementation risks, please refer to Covered Put Spread Risks.

Example

Let's take LBTC as an example:

  • BTC price: $60,000

  • Collateral in the Vault: 100 LBTC, worth $6,000,000

  • The Vault sells 100 BTC put options with a $56,000 strike for $250 each and buys 100 BTC put options with a $54,000 strike price for $100 each.

  • Net premium received: $15,000.

Scenario 1: BTC expires at $60,000

Both the short put options ($56,000 strike) and the long put options ($54,000 strike) expire OTM.

Breakdown:

  • Net Premium: +$15,000.

  • Short Put Options: $0 (expired OTM, worthless).

  • Long Put Options: $0 (expired OTM, worthless).

  • Total: +$15,000.

—> Vault buys 0.25 LBTC with the $15,000 to compound the yield.

—> Vault is up 0.25% in LBTC terms

Scneario 2: BTC expires at $55,900

The short put options ($56,000 strike) expire ITM and the long put options ($54,000 strike) expire OTM.

Breakdown:

  • Net Premium: +$15,000.

  • Short Put Options: -$10,000 ($55,900 - $56,000 * 100).

  • Long Put Options: $0 (expired OTM, worthless).

  • Total: +$5,000.

—> Vault buys 0.09 LBTC with the $5,000 to compound the yield.

—> Vault is up 0.09% in LBTC terms

Scenario 3: BTC expires at $55,500

The short put options ($56,000 strike) expire ITM and the long put options ($54,000 strike) expire OTM.

Breakdown:

  • Net Premium: +$15,000.

  • Short Put Options: -$50,000 ($55,500 - $56,000 * 100).

  • Long Put Options: $0 (expired OTM, worthless).

  • Total: -$35,000.

—> Vault sells 0.63 LBTC to clear the $35,000 debt.

—> Vault is down 0.63% in LBTC terms

Scenario 4: BTC expires at $52,000

Both the short put options ($56,000 strike) and the long put options ($54,000 strike) expire ITM.

Breakdown:

  • Net Premium: +$15,000.

  • Short Put Options: -$400,000 ($52,000 - $56,000 * 100).

  • Long Put Options: +$200,000 ($54,000 - $52,000 * 100).

  • Total: -$185,000 (note, the max USDC loss is always capped at $200,000).

—> Vault sells 3.56 LBTC to clear the $185,000 debt.

—> Vault is down 3.56% in LBTC terms

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