Call Selling
Last updated
Last updated
Check out this video explaining the strategy and the PnL scenarios (profit and loss)
There are two kinds of call selling vaults
Components
Sell far OTM Call option
Direction
📉 Bearish, Moderately Bullish
Not ideal for
📈 Extremely Bullish Market
Max Risk
⛔️ Capped*
Max Reward
💰 Capped
*Risk uncapped until the asset falls to zero.
One has to sell the far OTM(out of the money) call option to implement this strategy. A call selling strategy comes in handy when you have a moderately bearish view of the asset. This strategy is not ideal for an extremely bullish market.
The vaults will have multiple strike prices and multiple expiries. The strike prices for the strategies are determined using the following criterion.
Delta <= 0.25 from Lyra's AMM
Currently, the strike prices are selected by a permissioned manager; later, it will be automated. Users can find the selected strike price on the snapshot page.
Unlike v1, v2 vaults can trade multiple strikes from multiple expiries by capping risk at the same time. The vault will be able to dynamically select different strikes as the underlying price moves in another direction. At the same time, on-chain restrictions will limit the vault from selling risky options. Vaults are limited to selling options of delta less than 25.
If the options expire with ETH's spot price below the strike(out-of-the-money), the options are worthless, and the vault makes a profit. If the options expire with ETH's spot price above the strike price(in-the-money option) or at the strike(at-the-money), the options have some value that can be exercised. The AMM will claim some portion of the collateral to compensate the option buyers, and the rest will be returned to the vault.
Apart from smart contract risk, this strategy loses money when our assumption of the market being moderately bearish turns out to be false(Refer to Asset collateralised or sUSD collateralised). Even if the market being aggressively bearish, this strategy will make money.