How To Make Money With Crypto Options Trading: Polynomial.fi

2022-10-15 08:06

Polynomial

If crypto options trading looks too complicated for you or you don’t know how to start making money with options trading, this article is a must. Here we are going to explain all the important points which are critical for successful trading. Furthermore, a confirmed airdrop is waiting for you. If this interests you, keep watching
Let’s go!

Polynomial will be our first choice when it’s come to Crypto Options.

They are building in decentralized finance – a more fair, accessible, efficient, and transparent financial system enabled by crypto. Polynomial provides users the ability to earn yield in a sustainable way or hedge against divergent loss using various options strategies.

Ok, let’s start with some basics:

https://youtu.be/daKn2mCf1-8

What is an Option?

A crypto option is a contract that gives you the right but not the obligation to buy or sell an asset at a specific price called Strike Price.

Crypto option trading platforms give traders the ability to buy and sell call and put contracts that offer cryptocurrencies as the underlying asset. Much like their traditional finance counterpart, crypto options from these trading platforms are popularly used as hedging and leveraging instruments.

What is the Strike Price?

The strike price is the pre-determined price at which the buyer and seller of an option agreement on a contract or exercise a valid and unexpired option. While exercising a call option, the option holder buys the asset from the seller, while in the case of a put option, the option holder sells the asset to the seller.

In the case of both call and put options, the strike price remains the same throughout the life of the contract.

How does a Crypto Option contract works?

There are multiple types of options: call and put options and American and European options. Call options allow a trader to purchase an asset on a given date, while put options allow a trader to sell an asset on a given date.

Traders are required to pay fees to buy a contract. For example, if an option costs $100, a trader will bear this cost to enter on top of the actual price of the asset they want to purchase.

Regardless of the trade outcome, the trader must pay the $100 fee. So, options are not a completely-risk free method of trading crypto derivatives.

Let’s look at this example: Say you enter a call option for Ethereum at $1,300. However, upon the agreed date, the price dropped to $1,000. You would not have to bear the $300 loss in an option. You can just exercise your right not to fulfill the contract.

However, the $100 fee you paid to buy the contract will not be returned. In this case, your total loss would be $400.

What are Polynomial Earn vaults?

Polynomial automates financial derivative strategies to create products that deliver passive yield on various assets. Currently, Polynomial has a call selling and put sell strategy on their platform. Through a weekly automated option selling strategy, the vault generates a return on its deposits. To effectively compound the returns for depositors over time, the vault reinvests the yield into the strategy.

What chains are supported by Polynomial?

At the moment, only Optimism is supported. Optimism is a layer two scaling platform that inherits the security of Ethereum by being a rollup. Optimistic Rollups have been quicker to provide a generalized environment where multiple applications can exist. Also, the transactions are so fast, and the low gas fees.

What assets are supported by Polynomial?

Polynomial Earn Vaults use synthetic assets developed by Synthetix. If the user doesn't have the synthetic assets, then users should swap into synthetic assets to deposit into the Earn Vaults. The user can use the swap feature available on the site for this.

How do Polynomial vaults sell options?

Polynomial vaults sell the newly minted options to Lyra AMM in batches to collect yield.

Lyra is the most complete decentralized crypto exchange on Optimistim, giving traders 24/7 access to crypto markets with low fees and sub-second transaction speeds. Lyra combines the best of traditional options market-making with crypto’s two biggest strengths scalability and composability.

Options Primer

An option is a contract created between a buyer and seller of an asset, which gives the holder of the asset in question the option but not the obligation to purchase or sell the asset at a pre-determined price which is called the expiration date for a certain price which is known as the strike price.

What is Call Selling

There are two kinds of call-selling vaults:

Asset collateralized

In asset collateralized call selling vaults, the asset used for collateral for the option selling will be the respective asset. The premium is collected in the respective asset and is auto-compounded. For e.g., In sETH call selling vaults, the asset used as the collateral is sETH. Premium is collected in sUSD and converted to sETH.

Who is this vault for? Asset collateralized vaults are generally for users who'd like to stack more of that particular asset regardless of what the value of that asset is.

sUSD collateralized

In the sUSD collateralized vaults, the asset used for collateral for the option selling will be sUSD. The premium collected in the sUSD will be auto-compounded. Since sUSD is a stablecoin, the total position's value doesn't change due to the market situation.

Who is this vault for? sUSD collateralized vaults are generally for users looking for pure profit and want to do away with the volatility of the asset they are selling options for.

A call-selling strategy comes in handy when you have a moderately bearish view of the asset. This strategy is not ideal for an extremely bullish market.

Strike Price Determination

The vaults will have multiple strike prices and multiple expiries. The strike prices for the strategies are determined using the following criterion.

Delta <= 0.25 from Lyra's AMM

Currently, the strike prices are selected by a permissioned manager; later, it will be automated. Users can find the selected strike price on the snapshot page.

Multiple Strikes across Multiple Expiries

Unlike v1, v2 vaults can trade multiple strikes from multiple expiries by capping risk at the same time. The vault will be able to dynamically select different strikes as the underlying price moves in another direction. At the same time, on-chain restrictions will limit the vault from selling risky options. Vaults are limited to selling options of delta less than 25.

Settlement

If the options expire with ETH's spot price below the strike (out-of-the-money), the options are worthless, and the vault makes a profit.
If the options expire with ETH's spot price above the strike price (in-the-money option) or at the strike (at-the-money), the options have some value that can be exercised. The AMM will claim some portion of the collateral to compensate the option buyers, and the rest will be returned to the vault.

Market Risk

Apart from smart contract risk, this strategy loses money when our assumption of the market being moderately bearish turns out to be false. Even if the market is aggressively bearish, this strategy will make money.

What is Put Selling?

One has to sell the far OTM (Out of the Money) put option to implement this strategy. Put Selling strategy comes in handy when you have a moderately bullish view of the asset. The strategy is not ideal for an extremely bearish market.

Strike Price Determination

The vaults will have multiple strike prices and multiple expiries. The strike prices for the strategies are determined using the following criterion.

Delta <= 0.25 from Lyra's AMM

Currently, the strike prices are selected by a permissioned manager; later, it will be automated. Users can find the selected strike price on the snapshot page.

Multiple Strikes across Multiple Expiries

Unlike v1, v2 vaults can trade multiple strikes from multiple expiries by capping risk simultaneously. The vault will be able to dynamically select different strikes as the underlying price moves in another direction. At the same time, on-chain restrictions will limit the vault from selling risky options. Vaults are limited to selling options of delta less than 25.

Settlement

If the options expire with ETH's price above the strike (OTM), the options are worthless, and the vault makes a profit. If the options expire with ETH's price below the strike(ITM) or at the strike(ATM), the options have some value that can be exercised. The AMM will claim some portion of the collateral to compensate the option buyers, and the rest will be returned to the vault.

Market Risk

Apart from smart contract risk, this strategy loses money when our assumption of the market being moderately bullish turns out to be false. Even in the market is aggressively bullish, this strategy will make money.

What is Gamma Vault?

The Gamma Vault runs a fully on-chain delta-neutral strategy combining options and futures powered by Lyra and Synthetix Futures.

An option’s price can be influenced by several factors; these risk factors are measured using the Greeks. Delta, Gamma, Vega, and Theta are the primary greeks.

With this assumption, we can also define Greeks for Perpetual Futures. Unlike options, Perpetual Futures have a constant delta of 1 since price increments of underlying assets are reflected equally in Perpetual Futures. They also have a zero Gamma since the Delta is constant.

Gamma vault tries to profit from short-term volatility by taking advantage of options gamma. To achieve this, the vault buys a near at-the-money call option with the highest gamma and shorts perpetual futures equal to the delta of the option. This initial position structure is delta-neutral, which means the position is directionally neutral.

How to make Money with Options Trading?

Let’s make it simple, we will demonstrate the Call selling option, Asset collateralized.

Who is this vault for?

Asset collateralized vaults are generally for users who'd like to stack more of that particular asset, regardless of what the value of that asset is.

A scenario for the same is described below,

Let's say a user is selling one 100% collateralized option of ETH at 2,000 sUSD strike when the price is $2,000, for a premium of ~ 0.1 ETH (200 sUSD) upfront.

At expiry, there are three ways the market can go.

Case 1: ETH spot price moves up

Current Price: 2,200
Net Loss:

+0.1E (Premium Upfront ~ 220 sUSD) - 200 sUSD(~0.0909E Option Excersized) = 0.009E (20sUSD)Even though we lost 200 sUSD worth of ETH, our sUSD value for what is left of our initial capital stays relatively about the same as when we started because ETH is also up in value.

This is an advantage of asset-collateralized vaults!

Case 2: ETH spot price moves down

Current Price: 1800
Net Profit:

+0.1E (Premium Upfront ~ 180 sUSD) - 0E(Since Option is worthless) = +0.1E
Here we stacked more ETH; we started with 1ETH collateral and ended up with 0.1E more.

Total: 1E + 0.1E = 1.1E(~1980 sUSD)

We can see that even though we started with 2000 sUSD and stacked more ETH by selling options, we are still worse off than how we began in sUSD terms.

This is because we are paid in sETH, and our premium collected in sETH is also affected by price fluctuations. Here we stacked more ETH; we started with 1ETH collateral and ended up with 0.1E more.

Case 3: ETH price stays neutral

Current Price: 2000
Net Profit:

+0.1E (Premium Upfront ~ 200 sUSD) - 0 sUSD(Since Option is worthless) = +0.1E

Total: 1E (Collateral) + 0.1E = 1.1E(~ 2200 sUSD)In this case, ultimately, we end up more in terms of ETH & Dollars than how we started with.

Deposit

Synthetic Assets

Please note that the vaults only accept deposits with Synthetic Assets. Synths are created by Synthetix Protocol. Synths are derivative tokens providing exposure to a range of assets. They can be traded with infinite liquidity and zero slippage by leveraging the Synthetix protocol’s unique pooled collateral model.

sUSD (for the put-selling vaults)

sETH (for the call selling ETH vault)

But wait a minute, Something exciting has been announced, Polynomial Portal:

Introducing Polynomial Portal One click deposit from any chain. The Polynomial Portal is an exciting new web3 UX that allows users to deposit from any chain powered by Socket.

Polynomial is only available on Optimism, a Layer 2 chain. But liquidity in Web3 is fragmented across multiple chains.

First-time users of Polynomial are overwhelmed when they have to transfer assets via a bridge to Optimism and then convert those assets into Synths. Afterward, deposit it into the vault. Polynomial Portal aims to solve this broken UX as a first step toward abstracting such complexity for users.

Using Portal, Users can combine three separate user actions into one. A user can deposit assets from any EVM chain. Under the hood, these assets are first bridged to Optimism. After which, this asset is converted automatically to the asset used in the vault and deposited into the vault.

As of now, you are able to start depositing with Ethereum, Arbitrum, and Polygon chains. Hop and Optimism native bridge for bridging.

In a way, Polynomial are going multichain without going multichain. Smart! Yeah.

Min Deposit Time

Since there is no round system in the newer version, there will be a min deposit time to enter the position. The min deposit time ranges between 4 hours.

Withdraw

Users can withdraw at any time from the vault. Remember, there will be a minimum withdrawal time to process the withdrawal from the vault to your wallet.

Minimum Withdrawal Time

Since there is no round system in the newer version, there will be a minimum withdrawal time to exit from the position. The min withdrawal time ranges between 6-24hours.

Withdrawal Fee

If the user withdraws while the vaults have an active position, the vault will charge a 1% withdrawal fee for closing the position.

For the option selling vaults, after contracts expire for the week - there'll be a 2-hour gap before selling resumes; during this time, the vaults will charge no fees on withdrawals.

What risks does when depositing in the Earn Vault?

As a user, we are facing two types of risks:

Market Risk

Vault Strategies are subject to market risks that might adversely affect the user. You should be good at market move prediction.

Smart Contract Risk

Smart contracts are nascent technology and are subject to risks associated with code. The vaults are peer-reviewed smart contracts with an audit from :

https://peckshield.com/

Audits and peer reviews don't nullify the possibility of an exploit or hack, and it’s advised the users to only risk the amount of money they can afford to lose.

Backed by the best

Polynomial is backed by some of the big names in crypto and honestly, they are good enough to get even much more attention when it started to run on full horsepower. Look at these names, Archetype, Genblock Capital, Caballeros Capital, and even our friend Lito Coen from Cryptotesters. By the way, if you are a member of CryptoTesters, You are white-listed for Gamma vault.

https://twitter.com/cryptotesters

Does Polynomial have a token?

Polynomial does not have a token (YET), be aware of scammers. IYKYK.

If you are looking to hunt an airdrop, Polynomial has partnered with Optimism and, just a few months ago, airdropped its V1 vault users with huge OP Tokens. However, to incentivize the product usage on optimism, 450,000 OP Tokens will be giving liquidity mining rewards to future vault users of Polynomial. So, you have a good chance to get your hands on some OP tokens.