Imagine a market that only lets you sell assets, never buy...Could you be profitable?
That market isn't imaginary. That market is...Uniswap Liquidity Providing!
LPing = selling options, but what if users could SHORT LP tokens and effectively BUY options...?
LP = Short Put
LP positions on Uni V3 mimic the payoff of selling put options. Uniswap users can only deposit liquidity and sell put options, which means they can only take a bullish position.
Let's try to clear some misconceptions about providing liquidity in Uniswap v3:— Guillaume Lambert | lambert.eth | 🦇🔊 (@guil_lambert) January 29, 2023
🟣Uni v3 LPs aren't making markets, they're selling cash-secured puts.
- Token goes up, LP value goes up (but capped) 🚀
- Token goes down, LP value goes down 😭
While selling options can be profitable, our backtests show that it wasn't always the case 👇
3/11 Bad pools 😔 (but can you spot the good pool 🐶?)— Panoptic (@Panoptic_xyz) February 8, 2023
• ETH-USDC (5bps): -18%
• ETH-DAI (30bps): -14%
• ETH-USDC (30bps): -12%
• ETH-USDT (30bps): -11%
• ETH-USDC (100bps): -9%
• ETH-USDC (1bp): -6%
• ETH-USDT (5bps): -3%
• ETH-DAI (5bps): +7%
(Returns in stablecoin) pic.twitter.com/l1RWO8cLx6
Is there a way to "short" an LP position and effectively buy a put option...?
We'll answer this... But first, let's simulate an options buying strategy!
For this study:
- 🗓️ Jun 2021 - Jan 2023 (20 months) where applicable
- ⚖️ Daily rebalancing
- 📏 Narrow (r = 1.05) range ↔️ 0DTE
- Buy ATM put option by shorting LP position
- Exercise/close put option at end of day
- Pay LP swap fees as premia
Returns on buying ETH put options:
- 🌕 ETH-USDC (5bps): 112%
- 🚀 ETH-USDC (30bps): 85%
- 🧑🚀 ETH-USDC (100bps): 57%
(Returns in USDC)
👉Put option returns are exactly opposite of LP returns👈
L1/Utility Token Puts
Buying "L1/Utility token" put options:
- 🤩 BTT (+67%)
- 😍 GNO (+40%)
- 😊 $WBTC (+12%)
- 😦 MATIC (-47%)
- 😢 LINK (-86%)
- 😭 ENS (-101%)
(Returns in ETH, see legend 👇 for pool details)
DeFi Token Puts
Buying "DeFi token" put options:
- 😎 1INCH (+74%)
- 🙂 AAVE (+10%)
- 🙂 UNI (+10%)
- 😕 MKR (-1%)
(Returns in ETH)
👉DeFi puts did pretty good!👈
NFT/Meme Token Puts
Buying "NFT/Meme token" put options:
- 😶 LOOKS (-9%)
- 😬 APE (-42%)
- 😳 HEX (-52%)
(Returns in ETH)
👉Don't "put" ⤵️ down the meme tokens👈
- 🐻 Bearish price action = high payoff
- 💰 Payoff > premia → profit!
In TradFi, options buying is more profitable when Implied Volatility (IV) < Realized Volatility (RV). Do we see the same result here?
Instead of IV let's use the premia:
- Easier to calculate 🧮
- ⬆️ IV ⇔ ⬆️ Premia
- 🐶 Outperforming puts (green dots): lie above the line, low premia given volatility ("IV < RV")
- 😈 Underperforming puts (pink dots): lie below the line, too expensive ("IV > RV")
Is there a way to "short" an LP position and, hence, buy a put option?
Enter Panoptic! Panoptic allows you to buy and sell DeFi options for any crypto asset, any strike, any size.
1/25 DeFi Options Trading Is Powerful!— Panoptic (@Panoptic_xyz) February 22, 2023
There can be unlimited upside…😈
But also unlimited downside 😣
Every trader should know how to create these 18 options strategies in @Panoptic_xyz for any crypto asset, any strike, any size:
❤️ & rt 👇 pic.twitter.com/BAlyxdn0lz
- ⛽ Ignores gas/spread/swap fees/commission
- 💲 Assumes put option premia = LP collected fees
- ❓ This is a "what if" scenario — you can't buy put options on Uniswap (yet)
- ⚖️ Are LP returns in disequilibrium?
(Future #ResearchBites 😉)
- 📢 None of this should be taken as financial advice.
- ⚠️ Past performance is no guarantee of future results!