How to hedge ANYTHING (including UniV3 LP positions) with options 👇

Why options?

- Flexibility: Construct any payoff curve
- Greater protection: hedge against price going up AND down
- Capital efficiency: Low upfront cost for OTM puts/calls

Let's construct a hedge!

### 1. Identify your strategy's position.

Assume initial ETH price is $1,000. Let's start with 1,000 USDC. We sell 50% of that for ETH:

- x0 = 0.5 ETH
- y0 = 500 USDC

We LP 0.5 ETH & 500 USDC in the ETH-USDC pool.

### 2. Calculate the payoff curve for your strategy's position.

- Uni v2 LP value: V = 2L√S + fees
- S = (Spot) price of ETH
- L = √(x0 * y0)

Subtract our initial capital:

And for Uni v3...

- A
*bit*more complicated than Uni v2 - Formula (while in range) by @guil_lambert here
- Example: r = 1.3 → ±30% LP range (see 🧵 for why)

1/13 Read our latest #ResearchBites from @brandonly1000 of the@Panoptic_xyz research team!

— Panoptic (@Panoptic_xyz) January 18, 2023

=====

How do you LP on UniV3 with a ±% range?

E.g. if you wanted ±30% should you do:

1) Lower: P * 70%

Upper: P * 130%

or

2) Lower: P / 1.3

Upper: P * 1.3

Let's find out!👇 pic.twitter.com/QChXAuIonz

$V(S)=\frac{2\sqrt{K}r\left(\sqrt{S}-\sqrt{S_0}\right)-\left(S-S_0\right)}{r-1}+F,$

where

- $F\text{ = Accumulated fees},$
- $K=\sqrt{\text{PriceUpper}\cdot\text{PriceLower}},$
- $S_0=\text{Starting price},$
- $r=\sqrt{\frac{\text{PriceUpper}}{\text{PriceLower}}}$

### 3. Find an "inverted" payoff curve.

You want to hold a portfolio that pays the opposite. So just flip the payoff curve on its head. The goal is to flatten the curve into the pinkish line.

Example when r = 1.3 👇

### 4. Construct a portfolio replicating the inverse curve as closely as possible.

A long put option is a natural choice here since it benefits from $ movements down.

### 5. Finally, let's put them together.

Buy the hedge portfolio and hold it with your original position!

Assumptions:

- Initial ETH price = $1,000
- Long 1 ATM Put (strike = $1,000, DTE = 10)
- Put premium = $50
- LP fees = 3% (r = 1.3 ⇔ DTE ≈ 10)

How'd we do?

- S < $1,000: hedged payoff is flatter (and positive at times!)
- S $\geq$ $1,000: hedged payoff is lower (due to premium)

Hedging always costs $. We need to earn enough fees to cover the hedge price.

# Summary

- Understand how your position reacts to price changes
- Find an opposite reaction
- Figure out what assets you can hold to mimic the opposite reaction (this is your hedge!)
- Buy the hedge (with Panoptic😉)!
- Take comfort knowing you're protected🛡️

# What about impermanent loss (IL)?

- Notice we started with 100% of our capital in USDC.
- HODL portfolio of 100% USDC doesn't fluctuate → We already accounted for IL against a 100% USDC portfolio

But if we define IL against a 50/50 ETH-USDC HODL, we can hedge with a strangle:

# What about hedging with perps?

Pros:

- More liquid
- More asset listings
- Static delta (no gamma!)

Cons:

- Less flexible: can only short/long at current contract price
- Pay funding rate (if on the "wrong" side)
- Static delta (no gamma...)

# What about hedging with Squeeth?

Pros:

- More liquid
- Able to completely hedge delta/gamma

Cons:

- Only works for ETH-stablecoin pools
- High funding rates

# What are the drawbacks to using options?

- Listings: no long-tailed assets on Deribit/OKX/Binance (just ETH/BTC)
- Illiquidity: lower liquidity on deep OTM options
- High maintenance: options expire + time decay

Panoptic solves this! Here's how 👇

Panoptic is permissionless:

- Listings: Permissionless pool creation on top of UniV3
- Liquidity: Permissionless LP for options at any strike price
- No expiry: XPOs are non-expiring, perpetual options

Read the whitepaper here.

# Conclusion

Insights:

- LP positions look like short puts → LPers are selling options
- Only way to fully hedge an LP position is to short it

Only Panoptic enables shorting LP positions (any asset, any strike)!

- Broke: Hedging with expiring options
- Woke: Hedging with Panoptic XPOs

Disclaimer: This content is for educational purposes only and should not be relied upon as financial advice. Please DYOR!