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Options Strategies

This page provides an overview of basic options strategies you can execute on Lyra.

Long Call

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

- 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.

- 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.

- 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.

Long Put

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

- 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%).

- 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%).

- 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%).

Covered Call

Covered calls versus naked short calls

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).

Cash Secured Put

In Lyra's system, to sell a put you must collateralize it with sUSD. The payoff structure of a short position is as follows:

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Long Call

Long Put

Covered Call

Covered calls versus naked short calls

Cash Secured Put