Someone has asked me today:
<brief overview of $LUNA 'covered call' from @friktion_labs follows>
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<brief overview of $LUNA 'covered call' from @friktion_labs follows>
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https://twitter.com/dopeboyshanee/status/1483031408541159424
Before we jump into head first into anything, I think some of you might be wondering:
What the heck is a 'covered call'?
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What the heck is a 'covered call'?
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What we call "hodling" in TradFi may be called a "long position". We simply keep an asset in our wallet and (hopefully) enjoy it's price appreciation.
Visually, we can see a pretty straightforward relation between the asset price and value of a long position. Namely, 1:1.
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Visually, we can see a pretty straightforward relation between the asset price and value of a long position. Namely, 1:1.
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Imagine we bought an asset at its current price of $50. If the price drops, value of our position drops and vice-versa.
Any difference between future price and $50 becomes our profit/loss.
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Any difference between future price and $50 becomes our profit/loss.
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When we buy a 'call option on $LUNA' it allows us to purchase $LUNA at a certain (pre-determined) price called 'strike price'.
It gives us the _option_ to buy - we have no obligation to do anything do.
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It gives us the _option_ to buy - we have no obligation to do anything do.
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Example: call option on $LUNA with strike price of $65.
If $LUNA trades below $65, we do nothing and our position.
If it trades above $65, we can use (=exercise) the option to buy $LUNA for $65 and sell it on the market, cashing in the difference.
On the chart:
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If $LUNA trades below $65, we do nothing and our position.
If it trades above $65, we can use (=exercise) the option to buy $LUNA for $65 and sell it on the market, cashing in the difference.
On the chart:
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With such exposure to $LUNA price, we have no risk. No loss below $65 and only profits above $65 - that would be too good to be true.
Such a call option has a price (=premium) that we need to pay for the privilege to buy $LUNA at a fixed price.
Chart with $5 premium:
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Such a call option has a price (=premium) that we need to pay for the privilege to buy $LUNA at a fixed price.
Chart with $5 premium:
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The above is a case were we _buy_ a call option (=long call).
We could just as well _sell_ a call option (=short call).
In this case we would get the premium at a cost of negative exposure to price increase of $LUNA above the strike price.
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We could just as well _sell_ a call option (=short call).
In this case we would get the premium at a cost of negative exposure to price increase of $LUNA above the strike price.
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A "covered call" option is a combination of:
➡ Long position
➡ Short call
Below the strike price we get the full exposure to $LUNA price action AND the option premium.
Above strike price our profit flattens - does not grow any further.
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➡ Long position
➡ Short call
Below the strike price we get the full exposure to $LUNA price action AND the option premium.
Above strike price our profit flattens - does not grow any further.
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It is a good idea to buy covered calls that have a strike price above the current price. That gives us some room to benefit from increasing price of the (underlying) asset like $LUNA.
Luckily @friktion_labs does that automatically.
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Luckily @friktion_labs does that automatically.
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What we can see on the "Deposit" pop-up is:
👉Last traded option (=strike price): $94.00
👉Current price: $78.62
👉Projected APY (=compounded premiums): 100.6%.
Strike/current price should be clear now.
Let's unpack that APY part.
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👉Last traded option (=strike price): $94.00
👉Current price: $78.62
👉Projected APY (=compounded premiums): 100.6%.
Strike/current price should be clear now.
Let's unpack that APY part.
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First, the covered call options on @friktion_labs are with weekly maturities.
This means: such an option can only be exercised in a week from "creation time/date".
Time left until maturity is show on the pop-up too:
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This means: such an option can only be exercised in a week from "creation time/date".
Time left until maturity is show on the pop-up too:
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Unpacking will be easier once we hover over the "Projected APY" field label.
To my taste (just an average Joe who learned about options in the university and never traded) we can treat that 7-day yield as the option's premium.
1.10% per 7 days = 70.1% APR = 100.6% APY.
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To my taste (just an average Joe who learned about options in the university and never traded) we can treat that 7-day yield as the option's premium.
1.10% per 7 days = 70.1% APR = 100.6% APY.
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That's it for the brief introduction.
Tomorrow I will post another 🧵in which I will compare:
▶ $LUNA - $UST LP
▶ Covered call on $LUNA
Both of them provide some exposure to increasing price of $LUNA while providing decent APR.
Can't wait to crunch the numbers. 😊
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Tomorrow I will post another 🧵in which I will compare:
▶ $LUNA - $UST LP
▶ Covered call on $LUNA
Both of them provide some exposure to increasing price of $LUNA while providing decent APR.
Can't wait to crunch the numbers. 😊
/14-end
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