Put Selling
Components
Sell far OTM Put option
Direction
📈 Bull market, Moderately Bearish
Not ideal for
📉 Extremely Bearish Market
Max Risk
⛔️ Capped*
Max Reward
💰 Capped
*Risk uncapped until the stock falls to zero.
One has to sell the far OTM(Out of the Money) put option to implement this strategy. Put Selling strategy comes in handy when you have a moderately bullish view of the asset. The strategy is not ideal for an extremely bearish market.
Strike Price Determination
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.
Multiple Strikes across Multiple Expiries
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.
Settlement
If the options expire with ETH's price above the strike (OTM), the options are worthless, and the vault makes a profit. If the options expire with ETH's price below the strike(ITM) or at the strike(ATM), 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 back to the vault.
Market Risk
Apart from smart contract risk, this strategy loses money when our assumption of the market being moderately bullish turns out to be false(similar to scenario - 3). Even in the market is aggressively bullish, this strategy will make money.
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