Maximizing Profits: Buying Put Options on 16 Uniswap Pools
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 Putโ
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:
โ Guillaume Lambert | lambert.eth | ๐ฆ๐ (@guil_lambert) January 29, 2023
๐ฃUni v3 LPs aren't making markets, they're selling cash-secured puts.
- Token goes up, LP value goes up (but capped) ๐
- Token goes down, LP value goes down ๐ญ
While selling options can be profitable, our backtests show that it wasn't always the case ๐
3/11 Bad pools ๐ (but can you spot the good pool ๐ถ?)
โ Panoptic (@Panoptic_xyz) February 8, 2023
โข ETH-USDC (5bps): -18%
โข ETH-DAI (30bps): -14%
โข ETH-USDC (30bps): -12%
โข ETH-USDT (30bps): -11%
โข ETH-USDC (100bps): -9%
โข ETH-USDC (1bp): -6%
โข ETH-USDT (5bps): -3%
โข 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!
Backtest Strategyโ
For this study:
- ๐๏ธ Jun 2021 - Jan 2023 (20 months) where applicable
- โ๏ธ Daily rebalancing
- ๐ Narrow (r = 1.05) range โ๏ธ 0DTE
Daily strategy:
- Buy ATM put option by shorting LP position
- Exercise/close put option at end of day
- Pay LP swap fees as premia
ETH Putsโ
Returns on buying ETH put options:
- ๐ ETH-USDC (5bps): 112%
- ๐ ETH-USDC (30bps): 85%
- ๐งโ๐ ETH-USDC (100bps): 57%
(Returns in USDC)
๐Put option returns are exactly opposite of LP returns๐
L1/Utility Token Putsโ
Buying "L1/Utility token" put options:
- ๐คฉ BTT (+67%)
- ๐ GNO (+40%)
- ๐ $WBTC (+12%)
- ๐ฆ MATIC (-47%)
- ๐ข LINK (-86%)
- ๐ญ ENS (-101%)
(Returns in ETH, see legend ๐ for pool details)
DeFi Token Putsโ
Buying "DeFi token" put options:
- ๐ 1INCH (+74%)
- ๐ AAVE (+10%)
- ๐ UNI (+10%)
- ๐ MKR (-1%)
(Returns in ETH)
๐DeFi puts did pretty good!๐
NFT/Meme Token Putsโ
Buying "NFT/Meme token" put options:
- ๐ถ LOOKS (-9%)
- ๐ฌ APE (-42%)
- ๐ณ HEX (-52%)
(Returns in ETH)
๐Don't "put" โคต๏ธ down the meme tokens๐
Summaryโ
Key Insights:
- ๐ป Bearish price action = high payoff
- ๐ฐ Payoff > premia โ 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 ๐งฎ
- โฌ๏ธ IV โ โฌ๏ธ Premia
Graph above:
- ๐ถ Outperforming puts (green dots): lie above the line, low premia given volatility ("IV < RV")
- ๐ 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!
โ Panoptic (@Panoptic_xyz) February 22, 2023
There can be unlimited upsideโฆ๐
But also unlimited downside ๐ฃ
Every trader should know how to create these 18 options strategies in @Panoptic_xyz for any crypto asset, any strike, any size:
โค๏ธ & rt ๐ pic.twitter.com/BAlyxdn0lz
Caveats:
- โฝ Ignores gas/spread/swap fees/commission
- ๐ฒ Assumes put option premia = LP collected fees
- โ This is a "what if" scenario โ you can't buy put options on Uniswap (yet)
Question:
- โ๏ธ Are LP returns in disequilibrium?
(Future #ResearchBites ๐)
Disclaimer:
- ๐ข None of this should be taken as financial advice.
- โ ๏ธ Past performance is no guarantee of future results!