DeFi & Options
CLAMM Series 7: CLAMM Fees vs. Option Premiums
It is simple mathematics after all, my dear readers.
Last article we compared impermanent loss for a CLAMM tick and compared it to a payoff diagram for a short option position with a strike price equal to the tick price - these were shown to be exactly the same.
Where two products have identical payoffs, you would expect that the fees each party should earn should also be exactly the same (or at least close enough).
This article we will do a fee comparison to show that CLAMM LPs are being undercompensated for the risk they are taking.
Steady lads… the Dopex v2 tie-in is close.
When users write options, they earn a premium for taking that risk. The premium correlates to the likelihood of that option expiring in-the-money, the scenario where writers need to pay buyers settlement (Spot > Strike for calls; Spot < Strike for puts).
Premiums are priced using Black-Scholes Model which uses a number of inputs such as difference between spot and strike price, volatility, and days to expiration.
Let’s plug in a user who writes 1 call option on $ETH with a 1 week expiry and a $1,750 ATM (strike price = spot price) strike price and that $ETH volatility is 40%:
This writer will earn $38 in premiums for taking volatility risk.
CLAMM LP Fees at the Tick
CLAMM LPs earn fees based on their portion of pool liquidity, trading volume, and trading fees. For major pools such as ETH/USDC, trading fees are typically 0.05% of trading volume but can be as low as 0.01%.
Trading volume and portion of pool liquidity can be difficult to calculate. For the sake of simplicity, we will just look at fees earned each time the spot price passes the tick on an ETH/USDC pool with 0.05% fees.
As you can see, each time $1,750 is passed, the LP will earn $0.88 in trading fees.
This means an option writer will earn 43 times the trading fees for an equivalent position as a CLAMM LP while having the exact same payoff profile.
CLAMM LP Fees in a Range
Another thing to point out is that only 1 tick can be active at any single time - the tick that contains the current spot price.
So what if rather than having a single tick, a CLAMM LP has a range?
As you can see, they are still only earning trading fees for the single active tick which means all other liquidity is idle. Even if the price passes into the next tick, this means that the current active tick will just become inactive!
Another interesting lesson on CLAMM and option fundamentals.
Important points for this lesson are:
- CLAMM LPs at the tick are earning far less trading fees than equivalent option writers with the same payoff profile
- CLAMM LPs in a range will always have idle liquidity - as spot passes into the next tick, the current active tick becomes inactive.
Brothers and sisters, the time has finally come.
Next lesson we will dive into how Dopex v2 works to absolutely yoke the efficiency of your CLAMM positions.
Until next time, my beloved readers.
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner. Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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