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Feb 15, 2023 13 tweets 5 min read Read on X
1/13 Why are some pools good 🐶 and other pools bad 😈?

The answer comes from breaking down LP profits into:
1. Price changes 📈
2. Fees collected 🎟️

By comparing LPs to options, we discover parallel insights — let's explore! 🧵
2/13 Price changes
⬆️ Price up: positive return
⬇️ Price down: negative return
⤵️ Payoff determined by delta (Δ) & gamma (Γ) of LP position

Why use options terminology (Δ & Γ) for LPs?
Hint: that payoff looks awfully like a short put option!
3/13 Fees collected
• Determined by theta (Θ) of LP position

🕒 Θ: Rate of time decay (dV/dτ)
💰 dV = fees collected
🧊 dτ = 1 block

→ Θ = fees per block 🤯

✅ Near the money: Θ > 0
❌ Far the money: Θ = 0
4/13 In TradFi, options selling is more profitable when Implied Volatility (IV) > Realized Volatility (RV)

Can we compare IV-RV for LPs?

Yes! But let's use fees instead of IVs since:
• Easier calculation 🧮
• Fees collected ⇔ options premia 👇
• ⬆️ options premia ⇔ ⬆️ IV
5/13 Results match TradFi!

🐶 Good pools (green dots): lie below the line, compensated by high fees given volatility ("IV > RV")
😈 Bad pools (pink dots): lie above the line, not compensated enough ("IV < RV")

(Dot values are summed returns from LPing)
6/13 How do price changes and fees affect returns?

⬆️ Price → ⬆️ LP returns (since fees are always positive)
⬇️ Price → ⬆️ LP returns if Θ dominates
⬇️ Price → ⬇️ LP returns if Δ & Γ dominate

Let's define "dominance" so we can analyze pool returns! 👇
7/13 We define a metric to measure how much fees dominated LP returns

Θ dominance = fees / [ fees + |payoff| ]
(fees & payoff expressed as percentages)

Meaning:
💪100% Θ dominance → fees drove 100% of LP returns
🤕0% Θ dominance → price movement drove 100% of LP returns
8/13 Previously, we found that LPing on $ENS was highly profitable (+124%), but $UNI was not (-28%)

By graphing Θ dominance next to cumulative returns, we find:
😔 Bad days (negative returns) driven by price movement
🥳 Good days (positive returns) driven by fees
9/13 Breakdown of positive & negative returns confirms that
good pool Θ dominance > bad pool Θ dominance:

😔Bad days: 28% ($ENS) > 22% ($UNI)
😊Good days: 59% ($ENS) > 50% ($UNI)

The good pool also had a higher proportion of good days:
🤩ENS: 63% (272/433)
☹️UNI: 55% (335/608)
10/13 The good pool's fees made up for its bad payoffs ($ENS):
Fees: 466%
Payoff: -371%
Return: 95%

The bad pool's fees weren't enough to compensate ($UNI):
Fees: 309%
Payoff: -332%
Return: -23%

(All values are summed)
11/13
📣 Key Insights:

1. LP = short option payoff
2. Δ, Γ, and Θ affect LP returns
3. LPs compensated when IV > RV
4. Good days/pools driven more by fees than by price changes
12/13 Disclaimer:

📢 None of this should be taken as financial advice.
⚠️ Past performance is no guarantee of future results!
13/13 Comment below with questions.

Follow @Panoptic_xyz and @BrandonLy1000 for more #ResearchBites and other key updates!

Check out our blog 👉 panoptic.xyz/blog
Star & follow our GitHub repo 👉 github.com/panoptic-labs/…

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More from @Panoptic_xyz

Jun 28
Let's explore the relation between Panoptic and @Uniswap.

Uniswap v3 lets LPs concentrate liquidity in a specific price range, mirroring a put option payoff. The position converts into 100% of token Y when above range and 100% of token X when below range. Image
In Uniswap v3, LPs earn fees from traders as their liquidity facilitates trades. Panoptic extends this by introducing the concept of streamia, where option sellers continually earn these trading fees as streaming premia. Image
Panoptic introduces a market for lending and borrowing Uniswap v3 LP tokens. This enables traders to create long and short options positions.

Any token on Uniswap can be bought or sold as an option. Image
Read 6 tweets
May 24
Introducing the Panoptic Incentives Points (Pips) Program!

Pips are designed to boost user engagement, liquidity, and exploration of DeFi options. Earn Pips by participating in Panoptic, and get rewarded for your contributions.

We are seeking community feedback 👇 Image
How to Earn Pips:
➡️ Passive Liquidity Provision (LP): Earn Pips by depositing ETH.
➡️ Trading Options: Earn Pips by buying and selling in-range options.

To maintain a fair distribution, a set number of points will be allocated across three categories of Panoptic users ⤵️ Image
We're offering boosts to early users of the Panoptic and @Uniswap protocols (snapshot: March 1, 2024):

➡️ Panoptic beta testers (1.75x boost)
➡️ Uniswap V3 LPs (1.5x)
➡️ Uniswap V2 LPs (1.25x)

Boosts are multiplicative and allow users to earn >200,000 extra Pips ⤵️ Image
Read 6 tweets
May 10
1/8 Perpetual options are a new financial derivative, largely unexplored. Unlike traditional options, perpetual options don't expire.

But can you assign a 'time' component to something perpetual? How does pricing and rolling of perpetual options work? Let’s dive in 👇 Image
2/8 ⏳ What are timescales?

For perpetual options, timescales represent the estimated duration over which the option is expected to accrue premia. The concept is similar to the width of a LP position in @Uniswap V3, where the LP position aims to earn fees over a certain period. Image
3/8 For example:

The price range of this one-week (1W) $AVAX put is between $34.54 and $36.68. This means that the option will accumulate premia as long as the $AVAX price is between $34.54 and $36.68.

The width of this 1W option is $2.14 (2.14 = 36.68 - 34.54). Image
Read 8 tweets
Feb 3
1/6 Market Overview — January

Last month's market saw significant developments, starting with the monumental success of the BlackRock iShares Bitcoin ETF, which surpassed $2 billion in assets. This landmark achievement signals growing investor interest in crypto-based ETFs. Image
2/6 Following the ETF announcement, the crypto market experienced volatility compression. Both BTC and ETH implied vol moved sharply downward. Image
3/6 The anticipation around a potential Ethereum ETF grows, with regulatory approval deadlines approaching. This, coupled with the Bitcoin halving event, could significantly influence market dynamics in the coming months.
Read 6 tweets
Jan 24
⏰ Less than 24 hours to go on the @Avax🔺perpetual options trading contest!

Markets crashing with bearish sentiment — let's dive into some analysis of how the top traders used puts to go short and straddles to collect juicy streamia (streaming premia) fees in the trading arena! Image
Trader 0x376f has a huge lead on all $AVAX traders, currently sitting in first place with +57.34% PnL. Looks like 0x376f tested out a 0.3 AVAX put (left) that lost $0.44 in streamia before doubling down on a 7 AVAX contract (right)!

🔗 beta.panoptic.xyz/?view_as=0x376…

Image
Image
Smart move — ETF launch was a "sell the news" event Image
Read 9 tweets
Jan 23
1/5 Do you know which position offers the highest leverage?

1. Sold call
2. Sold put
3. Sold put and call

Challenge your options trading knowledge! 🧵👇

panoptic.xyz/research/panop…
2/5 💡 Leverage Demystified: Leverage in trading is about using less capital to control more value. It's a potent tool in the trader's arsenal, but knowing how to wield it makes all the difference.
3/5 📉 Selling Options: Selling calls and puts can provide significant leverage. But how does this compare to selling both a put and a call at the same time? 🤔 Image
Read 5 tweets

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