Fuerte Covered Strangle
First Covered Strangle strategy using Lyra Avalon release on Optimism
Project Description
The covered strangle strategy is a variation of decentralized option vaults (DOVs) that have become increasingly popular as they provide a yield that is not dependent on the market cycle. Covered strangle implies selling one covered call and one put, but the same payoff can be achieved by selling two covered calls or cash-secured puts with different strikes. Our implementation sells two covered calls, which allows us to keep ether as a base currency and save money on transaction costs. We used Lyra as a venue for writing options contracts.
A covered strangle strategy is a short volatility strategy with limited upside that takes a moderately bullish view on the underlying. Compared to the most popular DOV strategy – covered call – covered strangle partially protects downside risk. For example, if, during the life of the option, the underlying decreased by 10%, so would the holdings in the covered call vault, while the covered strangle vault would lose only ~5%. On the other hand, it also limits the upside. Generally, this strategy would be attractive for a sideways market and provide limited ETH exposure.
Vault sells options on a weekly basis. Contracts expire at 8:00 UTC every Friday, and the new round starts at 13:00 UTC. This five-hour window is when withdrawals and deposits are removed from or added to the vault.
Strike selection implies buying the closest strike to 0.1 delta for the OTM call and 0.9 delta for the ITM call. Premiums from selling options are changed into sETH and used to sell more contracts.
How it's Made
We used and enjoyed much hardhat, ethers, wagmi, rainbowkit, graphql, react, jotai, recharts, styled-components. For web3 tooling and integrations the project is obviously based on top of Lyra, we used subgraph to index events, hardhat tasks for automation, contracts are interacting with Synthetix to exchange assets, website uses chainlink oracle to display prices as well and all of that on Optimism :) Also we connected and contributed to defi-labs uniswap fee calculator while doing our research for strategy.
