Options Strategies
This page provides an overview of basic options strategies you can execute on Lyra.
You think the price of the asset is going up.
Payoff graph for long call position
If Alice pays $5 to buy the JAG June 30th 110 call option, she is buying the right to pay $110 for one JAG token on or before June 30th. The $5 she pays is called the premium. Let’s compare the outcomes of buying one of these calls for $5 to buying JAG for $100. We'll examine three scenarios that could occur on June 30th:
- 1.The price of JAG rises to $130
- 2.The price of JAG remains at $100
- 3.The price of JAG falls to $70
Scenario 1:
- If Alice had bought one JAG for $100, she would make $30 on her investment (+30%)
- If she had bought the June 30th 110 call for $5, she can purchase the coin for $110 and sell it for $130, netting $15 profit. Factoring in the $5 cost of the option, she has profited $20 - $5 = $15, making for a 300% (!!) return on her investment.
Scenario 2:
- If Alice had bought one JAG for $100, she would be flat (price unchanged).
- If she had bought the call for $5, so she would lose $5 (-100%). The option is worthless as the strike is greater than the token price.
Scenario 3:
- If Alice had bought one JAG for $100, she would lose $30 (-30%).
- If she had bought the call for $5, she would lose $5 (-100%).
These scenarios illustrate a couple of key points about options:
- They are great sources of leverage: In Scenario 1 Alice makes a return 10x greater than had she simply purchased JAG
- They protect buyers from downside: In Scenario 3 Alice only lost $5 compared to losing $30 had she bought the token. Note that she still retained the upside in the case that JAG had increased in value.
- They do poorly when the price of asset doesn’t move much: In Scenario 2, Alice loses her entire investment (-100%) compared to being flat had she bought the token.
When you own a call your upside is unlimited (since stocks can go up indefinitely), and your downside is capped at the price you paid for the call.
Why trade it? You think the stock is going up within a certain time frame.
Optimal conditions? Cheap volatility, bullish asset.
Example: Buy 10x September 100 Call for $5.
Cost: The premium you pay, in this example 10 x $5 = $50.
Theoretical Max Profit: Unlimited. It’s not likely an asset will go to infinity, but it’s theoretically possible.
Theoretical Max Loss: The price you paid for the call, in this example $50.
Breakeven at expiration: The strike plus the price you paid for the call (100 + $5 = $105).
You think the price of an asset is going down.
The payoff graph of a long put position is below:
Let’s re-run the three scenarios described in the previous section, this time comparing the purchase of the JAG June 30th 90 strike put for $5, against short selling one JAG token. Reiterating, the scenarios are:
- 1.The price of JAG rises to $130
- 2.The price of JAG remains at $100
- 3.The price of JAG falls to $70
Scenario 1:
- If Alice had short sold one JAG for $100, she'd lose $30 (-30%).
- If she had bought the put, she would lose the $5 premium as the asset price is greater than the strike price (-100%).
Scenario 2:
- If Alice had short sold one JAG for $100, she would remain flat.
- If she had bought the put, she would lose the $5 premium paid for the put (-100%).
Scenario 3:
- If Alice had short sold one JAG for $100, she'd make $30 (+30%)
- If she had bought the put, she could exercise the put to sell JAG at $90 and buy it back for $70. After factoring in the put premium, this is a profit of $15 (+300%).
Why trade it? You think the asset is going down within a certain time frame.
Optimal conditions? Cheap volatility, bearish asset.
Example: Buy 10x September 100 Put for $5.
Cost: The premium you pay, in this example 10 x $5 = $50.
Theoretical Max Profit: If the asset goes to zero, you make the difference between the strike and zero, minus the premium you paid, (100 - $5) x 10 = $950.
Theoretical Max Loss: The price you paid for the put, in this example $50.
Breakeven at expiration: The strike minus the price you paid for the put (100 - $5 = $95).
In a sentence: a covered call writer owns the underlying asset, and a naked short call writer does not.
In Lyra's system, to sell a call you must collateralize it with the underlying asset. This turns every call sale into what's known as a covered call. A covered call differs from a 'naked short' call, where the option is partially collateralized by cash (and not the underlying asset). To write a covered call the writer must first purchase the underlying asset, which means they are long the asset itself. The accompanying short call position offsets this somewhat, but unless the call is 100 delta, the option seller remains net long the underlying asset (whereas they would be net short with a short call position).
Covered Call
Why trade it? You think an asset is going up, is going to trend sideways, or take a small dip in price.
Optimal conditions: Lower realized volatility than IV, small bullish to sideways stock
Example: Long 1 ETH for $2000 against short a 2500 strike call for $300 with 30 days to expiration.
Cost: Share of asset, less premium received for call ($2000 - $300 = $1700).
Theoretical Max Profit: The maximum profit occurs when the price of the asset rises to the strike price on expiration, so the call you sold is worthless and your asset appreciates in value. In this example, if ETH rose from $2000 to $2500 on expiration the profit would be $800 ($2500 - $2000 + $300).
Theoretical Max Loss: If the price of the asset goes to 0, you lose the amount you paid for the asset less the call premium. In this example it would be $1700 ($2000 - $300).
Breakeven At Expiration: The asset price minus the premium collected ($2000 - $300 = $1700).
In Lyra's system, to sell a put you must collateralize it with sUSD. The payoff structure of a short position is as follows:
Why trade it? If you think a stock is going up, staying where it is, or only going down a small amount.
Setup: Sell a put short, post the strike price as collateral (in cash)
Example: Selling the ETH 2000 put expiring in 15 days for $150.
Cost: The collateral posted minus the premium received from the put ($2000 - $150 = $1850).
Max Profit: The premium received for the put ($150).
Max Loss: The difference between the strike price and zero, minus the premium received for the put ($2000 - $0 - $150 = $1850).
Breakeven at expiration: The strike minus the premium received ($2000 - $150 = $1850).
Last modified 8mo ago