From a high level, the platform’s users can be broken down into three sectors:
- Buyers – those who are purchasing protective puts. They have the right to redeem puts at the strike price.
- Sellers – Those who are selling protective puts. They are supplying liquidity (in USDC) and committing to honor a redemption at the strike price.
- Market Makers – Those who are arbitraging puts on secondary markets like Uniswap.
In recent weeks, we’ve noticed a lot of demand coming from Opyn’s promising returns on ETH covers not only on selling puts and earning interset but also on arbitraging them on secondary markets.
If this not cool I really don't know what is.
— 🔮 ExHuman.eth (@3xhuman) April 10, 2020
To quickly summarize why this is, returns earned from puts vary relative to their “moneyness” or how close they are to a given strike price.
- Sellers can earn revenue by selling puts which are highly unlikely to be redeemed and collecting interest when they expire
- Buyers can use puts to purchase ETH at a strike price even when the market value is below that strike price
- Market markers can arbitrage purchased puts using Deribit, creating a market equilibrium on the price of a given option.
— 찌 G 跻 じ ⚡️ 🔑 (@DegenSpartan) April 10, 2020
Let’s walk through Opyn’s different revenue opportunities using ETH put options and the things to note about each.
Selling covers on Opyn is synonymous with lending stablecoins on Compound with one key exception. Those who provide liquidity are giving buyers the right to redeem their option for the underlying strike price at any point in the future.
In this example, we’ll take a look at selling put protection on ETH with a $150 strike price which expires on 04/24.
To start, head over to https://opyn.co/#/sell and scroll to the “Available” tab at the bottom of the page.
Click on the desired strike price to bring up this window.
When hitting continue, users will need to unlock USDC for trading. Simply input the amount of USDC you wish to supply and hit confirm. Please take note of the estimated APR and the expiry date as these are the two most important things to keep in mind.
When selling a put, users will get confirmation on the righthand side of the page.
Active put sales can be managed under the “Insurance Sold” tab which allows users to either add more liquidity or reduce their position.
Please note that users who are selling put options earn interest for the entirety of the options life. If the option is not redeemed upon expire (in this case 04/24) the user will receive their collateral back plus interest.
The reason the returns can get so high is that if an option is redeemed, the collateral will be used to purchase ETH at $150, even if the price of ETH is below $150.
Using the same flow as above, let’s examine how to purchase a put on ETH at a strike price of $150 expiring on April 24ht. Navigate to the bottom of the page and select the strike price option which you wish to buy a cover for.
This will bring users to the purchasing screen where they can examine characteristics like the liquidity in Uniswap, protection cost per ETH and the expiry date. Select “Continue Purchase” to proceed.
Enter the amount of ETH which you would like coverage for. This is the amount of coverage you are purchasing in the event a put can be redeemed for the strike price. Here you can see we are purchasing 1 ETH worth of protection for roughly $6.
Hit “Confirm” and accept the prompted transaction. While the transaction is confirming, we recommend using this opportunity to snag the Uniswap contract address by selecting the Etherscan link. This is helpful for the third part of our tutorial 😉
Once the purchase is confirmed, you’ll now have a corresponding amount of oTokens (in this case oETH $150) which represents your cover amount. The easiest way to see how much ETH you have protected is in the “ETH Protected” section of the Insure page.
Trading Covers on Uniswap
Here’s where things get interesting.At any point in time, users can sell their put early by pressing the “Sell Early” Tab.
Alternatively, users can access this pool using the Etherscan link from above by navigating to the “Token Transfer” line and located the oToken transfer.
Click the “Opyn ETH Put” link and locate the contract address in the top right hand side of Etherscan.
Copy that contract address (in this case 0xaefc7b368f7b536c9e5e3f342bf534931ce58584) and head to Uniswap. Enter the oETH $150 address in the “In” section by clicking on ETH and entering the contract address from Etherscan.
Unlock the tokens for trading and boom! You are now able to sell your oETH $150 as it changes in value up until expiry.
Opyn is unique in that there are many different angles to make a return with specialized knowledge. To summarize what we just covered, users can:
- Earn an attractive return on stablecoin lending by selling puts
- Hedge against ETH price volatility by redeeming a cover at strike price
- Sell a purchased put option for more value as it gets closer to strike price
To quickly cover the dynamics of each, returns on stablecoin lending become higher the closer an option gets to the strike price. This is due to the risk that the option will be redeemed when the asset (in this case ETH) drops below it’s strike price ($150) and is redeemed.
Another way of looking at Opyn is selling puts which are highly unlikely to be redeemed. In the event that the option is not redeemed, users effectively earn all of their collateral back plus interest.
The price of a put option will increase the closer it gets to the strike price. The cost for the right to sell ETH for $150 becomes more valuable as the price of ETH nears, or even drops below $150. Using the example above, the price for us to buy 1ETH of coverage at a $150 strike price was ~$6. We can assume that if ETH price were to near $150, the price of that option would increase, allowing users to arbitrage on a secondary market like Uniswap.
For our more sophisticated users, be on the lookout for arbitrage opportunities on Deribit.