osETH Turbo Vault On Opium Finance— How To Use and What To Expect
We are excited to see Turbo Vaults for osETH launched by Opium Finance.
Thanks to the Turbo Vaults, StakeWise users now have the option to pursue an automated covered call selling strategy using their liquid staked ETH.
In this strategy, osETH tokens are used as collateral to sell options, allowing depositors to collect option premiums to earn a steady yield.
You can deposit osETH into the Turbo Vault now by choosing the Vault from a list of ‘Staking” products in the Opium Finance app: https://app.opium.finance/eth/staking.
Note that this strategy carries above average risk, so we recommend fully understanding the mechanics of covered call strategies before depositing funds into the Turbo Vault. The risk of the strategy is “selling” ETH at the strike price on the maturity date (every Friday) if the strike price is reached.
Below we explain the mechanics of Turbo Vaults, followed by the generalized explanation of covered call strategies and their risks.
How Turbo Vaults work
Turbo Vaults from Opium Finance allow users to deposit osETH as collateral for a covered call strategy on ETH, options premiums can be earned on top of the staking yield. This naturally boosts the overall yield from pursuing the covered call strategy that is traditionally available only with ETH.
The mechanics of the Turbo Vault mean that Opium’s smart contracts regularly (every week) sell options on behalf of depositors in the Turbo Vault and handle the settlement of profit / loss upon options expiration date. Here are the general rules of the Vault:
🗓 Strike price is chosen weekly, and a new batch of options is sold every Friday
📈 Strike price is set according to a specified delta, which is +30% to the price of ETH at the moment of selling options
⚖️ Settlement and profit / loss is calculated weekly on Friday at 8 AM UTC
❌ There is no leverage used in this strategy i.e. Vault’s exposure is equal to the amount of capital deposited in the Vault.
Note that in periods of high volatility, strike price delta can be set higher by the Pool Advisor that is the Opium Finance’s DAO. This is always done based on current volatility, but only within a limited range so it cannot harm the Vault.
An example calculation of profit / loss in the osETH Turbo Vault
Whenever options expire in the money
- A user stakes 10 osETH (worth ~10 ETH for simplicity)
- Vault’s strike price for the week is $1,500 per 1 ETH
- Time at the moment of settlement is $1,800
- Option premium is 0.04 ETH
Weekly profit / loss calculation = option premium + min{(strike price — settlement price) / settlement price * user’s stake; 0} = 0.04 ETH + min{($1,500 — $1,800) / $1,500 * 10 osETH; 0} = -1.63 osETH
Final user stake is 8.37 osETH ie ~ 15’000$, which represents 10 ETH being sold at 1500$. While the user is worse off in ETH terms, in USD terms their position has increased to reflect the price of $1,500 per ETH.
Whenever options expire out of the money
- A user stakes 10 osETH (worth ~10 ETH for simplicity)
- Vault’s strike price for the week is $1,500 per 1 ETH
- Time at the moment of settlement is $1,200
- Option premium is 0.04 ETH
Weekly profit / loss calculation = option premium + min{(strike price — settlement price) / settlement price * user’s stake; 0} = 0.04 ETH + min{($1,500 — $1,200) / $1,500 * 10 sETH2; 0} = 0.04 ETH
Thus, the user has collected the weekly premium as profit.
Why participate in the covered call strategy
Why would you as a trader consistently run a covered call strategy? Assuming that every week you sell call options with a strike price that’s truly unattainable for ETH within that given week, you will earn a steady stream of options premiums — this is essentially your income from the strategy. Dividing that by the value of ETH you hold to cover the position, you arrive at a yield from covered call selling.
This strategy can be interesting for traders who are happy to tactically sell if the price rallies +30% within the week. For them the risk of the strategy is not the risk but rather an opportunity.
Such yields vary depending on the distance of strike from the current price, the volatility of ETH price, and other parameters, but are generally assumed to range between 5 and 15% throughout different points of the year. The UI of covered call strategy vaults will typically show the currently expected APR by projecting the last week’s gain from receiving options premiums onto the next 52 weeks (i.e. 1 year).
If you feel familiar with the benefits & risks of participating in a covered call selling strategy, head to the Opium Finance app and deposit osETH into our Turbo Vault here: https://app.opium.finance/eth/staking.
A short primer on a covered call options strategy
At a very basic level, a covered call strategy means that a trader regularly sells call options –instruments that give whoever holds them the right to buy a certain asset at a fixed price & date in the future — while holding the asset in question. We’ll analyze it through an example with ETH as the asset.
Suppose you do trading for a living and have a strong idea about the price of ETH. Let’s say today ETH price is at $1,500 and you are convinced that in a week its price will not exceed $2,000, i.e. ETH will not appreciate by more than 33%. The best way to trade this conviction is by selling ETH call options — rights to buy ETH — to the market, with an expiration date set 1 week away from now, and $2,000 as the strike price. Expiration date is the moment the option can be used by its holder, and the strike price is the price at which they can buy ETH from you.
Let’s break down the two possible outcomes from selling calls this way.
Scenario 1: ETH price is <=$2,000 at the moment of expiration
If in 1 week (expiration date) ETH price is below or at $2,000, the options you sold will expire unexercised, i.e. their holder will not use their right to buy ETH at $2,000 from you, preferring instead to buy from the market where ETH price is below $2,000. This scenario is what you have expected, and received the so-called options premium, i.e. price paid by the options buyer, as income. You are happy.
Scenario 2: ETH price is at $2,000 or above at the moment of expiration
If in 1 week (expiration date) ETH price is above $2,000, the options you sold will be exercised, i.e. their holder will use their right to buy ETH at $2,000 from you, instead of buying ETH at a higher market price. This scenario is not what you expected and you are in trouble — you now have to buy ETH from the open market at a price above $2,000, and sell it for only $2,000 to the options buyer. In exchange, you only received the options premium, i.e. the price paid to you for the option you sold. Depending on your strategy as a trader, you may be very unhappy (if you didn’t plan to sell your ETH) or you may be satisfied (if selling ETH at certain levels is a goal anyway).
We can use this chart to describe the payoff for you as a trader across a spectrum of ETH prices at expiration, when simply selling calls:
Your profit is always a weekly premium whenever the market price of ETH is $2,000 or less. This is highlighted by the green line (+ve values on the Y axis).
However, once it breaches $2,000, your profit quickly turns into a loss that, like the price of ETH, is uncapped (i.e. can theoretically go to infinity). This is highlighted by the red line (-ve values on the Y axis).
Now we can see that simply selling calls can be very risky — you can end up owing lots of money to the options buyer because ETH price doesn’t have a cap (at least in theory). So should we look for ways to minimize this downside risk?
This is where covered call selling strategy comes in. Instead of selling calls naked, i.e. without holding the underlying asset, covered selling allows to minimize the downside risk. Since you already own the ETH you need to sell, you can avoid being run into the ground by the (theoretically) skyrocketing market price of ETH. Your loss is capped.
To put it into numbers, if you hold 1 ETH and sell a call option with a right to buy 1 ETH at $2,000 in 1 week, then the worst that can happen is that ETH exceeds $2,000 and you will be forced to sell your (now) appreciated ETH at mere $2,000. Therefore, your downside risk is 0. However, the upside in your ETH position is now capped too, bounded by the difference between the strike price and your entry price. This is what covered call selling is about — capping your upside but limiting the downside risk of selling call options.
