Overiew
Dopex, as they state themselves, is “a decentralized options protocol which aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers - all in a passive manner for liquidity contributing participants”. But what does this all mean, and how can you use it?
Some basic options jargon
Firstly, some very basic options jargon to help people who might not know anything about options. I won’t go into any nuanced stuff like volatility surfaces, skew, gamma, vega. This is just an overview of how it all works, and why you might be interested in using it.
Option Premium – this is the cost of the option that is trading. This money settles right away, and isn’t given back if the option expires worthless (this is the yield that over writers get, over writers are explained later in the thread)
Call options - these give the buyer the option to buy the underlying asset for a pre-agreed price (the strike price) at a certain point in time in the future (the option expiry date). i.e. if you buy the ETH $4000 call expiring on the 31st April you can buy 1 ETH for $4000 if you want, but you don’t have to, on the 31st of April. If ETH is trading at $4500 on 31st of April, you will exercise this option, and actually buy 1 ETH for $4000, and then either hold onto it, or most likely instantly sell it in the market to realise this $500 gain. When the underlying is trading above the strike price, then the option is said to be in-the-money (ITM), as it will most likely be exercised. If the underlying is trading below the strike price, it is said to be out-of-the-money (OTM) and most likely won’t be exercised. In our example, if ETH is trading at $3500 on 31st of April, you wouldn’t choose to buy it at $4000 obviously, so the option expires worthless.
Put options – these are essentially the reverse of call options, but here the buyer gets the option to SELL the underlying at the strike price on expiration. These are mainly used for hedging purposes. i.e. you own 1 ETH trading at $3250 dollars, you are worried the price will decrease. You can pay for a $2500 strike put, so no matter what the worst case on expiration is that you can sell that 1 ETH for $2500. Again you would only exercise it if the price is below $2500 on expiration.
Just get to the yield already
The main source of yield on Dopex right now is their SSOVs or Single-Staking Options Vaults. They can offer attractive returns, and most importantly don’t require you to convert your precious coins to something else, or risk any sort of impermanent loss as they aren’t LPs. What they are is a premium collecting service through which users can sell options, both calls and puts, to generate yield. So how do they work exactly?
For SSOV-Calls, users deposit the underlying asset and select the strike prices that they wish to collect yield on. The vault then sells calls to buyers at those strike prices. You do actually collect this premium, and this is essentially where you yield comes from. If at expiration the underlying asset is trading below your strike price, then your asset is returned to you on top of the premium collected from selling the calls. However, and this is important, if the asset is trading above your strike price, then you will sell it at that price, and receive that price + the premium of the call you sold. You can think of this as selling some of the upside of the underlying to someone else. If ETH is trading at $3250, and you sell the $4000 call which expires ITM (trading at above $4000). Then you still have made money from ETH rising in value + the call premium, but you are giving up the potential for ETH to be worth a lot more than $4000 at expiration. If ETH is trading at $5000 at expiration, you will sell it for $4000 and no longer have exposure to ETH anymore. If you want to keep that exposure you will have to go to the market and buy it again for $5000. At the moment the options aren’t exhaustive but with demand they will be adding more options.
SSOV-Puts work by user depositing stable coins that will be used to purchase assets at the strike price should the options finish in the money. So, for example, you hold stable coins anticipating a drop in price of ETH, but you want to earn yield while waiting for the drop. You also don’t want to LP as you want to be able to quickly have cash available to buy. You could put limit orders on an exchange and wait OR you could sell puts at where you want to put your limit orders in. For example you might sell the $2000 strike put. This means you collect some premium, and if ETH is trading below $2000 at expiry then you buy ETH at $2000. If it is trading above the strike price, then you just get your $2000 back plus the put premium that you collected. Why doesn’t everyone do this? Well if ETH crashes to $1800 the day before expiry, and then rallies all the way back to $3000 on the day of expiry, then your put expires worthless and you just get the premium plus your $2000 back, you never actually buy the ETH, whereas the limit order would have gotten filled.
Some final thoughts
Both these SSOVs are widely used in traditional finance to generate additional yield for portfolios, with options overwriting generating yield for large funds that have to hold the assets anyway. If there is systematic options selling, then there are times that these options might be trading cheap, and there will always be buyers if the market is liquid enough. But if you are not planning on being a full-time options trader, and are happy to earn additional yield then this is a very nice way to do it. Consistently selling options is pretty much always going to incur some some sort of relative loss, but it’s a time proven strategy to generate yield in a fairly passive way.