CLAMM Series 6: Ticks as Options
In the last two articles we covered two important topics:
- Composition of a tick
- Impermanent loss of a tick
This lesson we will review these and show how the payoff is actually exactly the same as a short option, similar to how our original SSOV designs worked.
Let us engage in a smidgen of education my dears.
Review of the Composition of a Tick
Let’s take a look at 1 $ETH deposited into a $1,750 ETH/USDC tick.
Interesting.
If the spot price is lower than $1,750, the position will be 100% $ETH worth a variable $USDC amount.
The $ETH will be worth a variable amount - at $ETH = $1,650, the position holds 1 $ETH worth $1,650.
If the spot price is higher than $1,750, the position will be 100% $USDC worth exactly $1,750.
The exact spot price is irrelevant as long as it is higher than $1,750.
$ETH = $1,900? You have $1,750.
$ETH = $2,400? You have $1,750.
$ETH = 1 gorillion dollars? You have $1,750.
Impermanent Loss of a Tick
Now let’s look at impermanent loss (“IL”) of that same tick - remember that IL is the difference between the value of the composition of the tick compared to what was originally deposited.
Since we started with 1 $ETH, we will be comparing with this same 1 $ETH.
When the spot price is lower than $1,750, the composition will be 100% $ETH.
You have the same 1 $ETH you originally deposited and no IL.
When the spot price is higher than $1,750, the composition will be 100% $USDC with 1,750 $USDC.
If the spot price is $1,900, your $1,750 is worth 0.92 $ETH (1,750/1,900).
If the spot price is $2,400, your $1,750 is worth 0.73 $ETH (1,750/2,400).
If the spot price is 1 gorillion dollars… bollocks.
Comparing IL to Options
For those unfamiliar, an option is the right, but not the obligation, to buy or sell an asset at a predetermined strike price at a predetermined strike date.
Let’s take a scenario of a short covered call on $ETH with a $1,750 strike price. As a call writer, they earn a premium but will pay the difference between the spot price and strike price if $ETH is more than $1,750 at settlement.
This will give the following payoff diagram:
If the spot price is below $1,750, the writer simply gets back their full collateral which is 1 $ETH.
1 $ETH deposited, 1 $ETH returned.
If the spot price is greater than the spot price, they will receive less $ETH back since they have to pay settlement to option buyers.
If the spot price is $1,900, writers will get back 0.92 $ETH (1 - [(1,900-1,750)/1,750]).
If the spot price is $2,400, writers will get back 0.73 $ETH (1 - [(2,400-1,750)/1,750]).
If the spot price is 1 gorillion dollars, I will let you do the math yourself!
As you can see, the payoff for a short option position is identical to the payoff for a CLAMM LP position.
Riveting stuff…
Closing Comments
This lesson we did a little comparison between CLAMM LPs at the tick versus option writers with a single take home point:
CLAMM LPs at the tick have exactly the same payoff as Option Writers whose strike price is equal to the tick price..
With two identical payoffs, an efficient market aficionado would assume both parties would be equally compensated. However, when you break down the fees, you will see this is NOT the case.
Next lesson, we will be doing a fee comparison of option premiums vs. LP trading fees to show that CLAMM LPs are being undercompensated for the risk they are taking.
Until next time, my dear students.
Warm regards,
CEO
About Stryke
Stryke is a decentralised options protocol that focuses on maximising liquidity and enhancing gains for option buyers while minimising losses for option writers—all in a passive approach.Stryke employs option pools that enable anyone to effortlessly earn yield. The protocol provides value to both option sellers and buyers by ensuring equitable and optimised prices for options at various strike prices and expiries, achieved through our proprietary, cutting-edge option pricing model designed to mirror volatility smiles.
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