DeFi Option Vault - DOV
DeFi Option Vaults (DOV) are automated vaults running with a preset options strategy. The strategy determines whether a put or call option is sold. Yield is earned by collecting premiums that accrue when the option expires 'out-of-the-money'.
Before DOVs, option strategies were only available to accredited investors through over-the-counter (OTC) trading or by self-execution on option exchanges like Deribit.
The automation is facilitated through a smart-contract on the blockchain. Users can deposit their assets into the smart-contract/vault and it will automatically start earning on a weekly basis. Apart from the obvious advantage of automatization, another advantage is the saving of gas. Once the assets are deposited, there is no further action required from the user, until he wants to redeem his returns. Transactions from all users of the vault are pooled together, saving a lot of gasfees.
The best result for a vault is when the sold options do not get exercised and expire worthless ('out-of-the-money'), but the premium from selling the options is still collected. To reduce the risk of the option getting exercised we can vary two parameters: Strike Price and Delivery Date
The further away the Strike Price is from the Spot Price at the start of a cycle, the less likely it is that an option is exercised. This is logical, since large price movements are generally less likely.
The longer the cycle of the vault, the harder it gets to predict the price action of the underlying asset. For example it is harder to say where BTC will be in a week, compared to a year.
Our first vaults will run a weekly cycle with Strike Prices XX% away from Spot Price.