Deposit: ETH Return: Earn premium and accumulate more ETH with the premium of options sold during times ETH doesn't skyrocket. Risk: The main risk is missing out on ETH appreciation, in exchange for the premium which is used to buy more ETH. The pool can lose a significant amount of ETH if the price of ETH skyrockets.
Deposit: USDC Return: Earn interest on USDC deposit on AAVE (aUSDC) and accumulate more aUSDC with the premium of options sold during times ETH doesn't fall abruptly. Risk: The pool can lose a significant amount of USDC if the price of ETH falls abruptly.
Deposit: WBTC Return: Earn premium and accumulate more WBTCwith the premium of options sold during times WBTC doesn't skyrocket. Risk: The main risk is missing out on WBTC appreciation, in exchange for the premium which is used to buy more WBTC. The pool can lose a significant amount of WBTC if the price of WBTC skyrockets.
Deposit: USDC Return: Earn interest on USDC deposit on AAVE and accumulate more aUSDC with the premium of options sold during times WBTC doesn't fall abruptly. Risk: The pool can lose a significant amount of USDC if the price of WBTC falls abruptly.
Currently, all public pools sell options with maximum expiration of 30 days from the day of purchase.
The premium is calculated using the Black-Scholes model, the implied volatility is manually updated on the smart contracts and displayed on the pools section, we are working to add implied volatility oracles in the future.
What happens when the pool option positions are exercised?
For write call pools, the pool will receive the equivalent of the strike price for each option exercised. For write put pools, the pool will receive 1 WBTC/ETH for each option exercised. This amount is converted back to the deposit asset (ETH/WBTC for call pools and aUSDC for put pools) using Uniswap liquidity at any time and then can be used to sell again options.
There are two ways to withdrawal your liquidity:
1) Withdraw (Normal) This one is equivalent to receiving your pro-rata share of free liquidity and the equivalent net value of open positions (CollateralOnOpenPositions-TotalCurrentValueOfOptionsSold*1.1). It is similar to buying back the options sold by the pool.
If you own 10% of the liquidity tokens, you will receive:
10% of liquidity free on the pools (ETH or WBTC+USDC) + the amount of deposit asset equivalent to 10% of the net value of open positions which is calculated with the total value of collateral locked on open positions - the current price of all options*1.1 . This 10% fee on top of the current price of the options is charged to exit open positions.
For example, considering the Write ETH Pool has: Free Liquidity
OPTION VALUE in ETH (Calculated using BS with current IV and price of ETH + 10%)
(COLLATERAL LOCKED-OPTIONS VALUE)
If you own 10% of liquidity tokens, you would receive: 10% of Free liquidity (30 ETH + 100 USDC) + 10% of net value of open positions (0.21719 ETH) = 30.21719 ETH + 100 USDC
2) Transferring Open Positions
If there is not enough liquidity to use the first withdrawal method, you can wait until there is free liquidity, or you can withdraw your pro-rata share of free liquidity and transfer the pro-rata share of open positions to your wallet. If you choose this method, if they are exercised, you will receive the amount in your wallet directly, but if they expire without being exercised, you will need to manually withdraw the collateral back after expiration by accessing the Manage tab.
Considering the example used above, you would receive 30ETH + 100 USDC and an open position of - 0.22019 ACO ETH-2500USDC-C-23APR21-0800UTC would be transferred to your wallet. After expiration, if the option is not exercised, you can redeem back the collateral amount for this open position ( 0.22019 ETH ). And if the option is exercised, you would receive 0.22019*2500(Amount Of options * Strike Price)= 550.475 USDC directly in your wallet.