Covered Calls
An overview of executing trustless on-chain covered calls via MYSO
MYSO's architecture enables bespoke and fully customizable covered calls without counterparty risk for nearly any token. The offering allows token holders to lend otherwise idle tokens to generate upfront stablecoin revenue by writing call options. In contrast to other covered call solutions, with MYSO users can do covered calls for almost any altcoin, and trading firms can access the underlying token, which they can then use for hedging, trading, and gamma scalping.
Covered calls are a well-known yield enhancement strategy from TradFi that can also be applied in crypto. In the case of MYSO, users can earn stablecoin upfront yield for lending an altcoin for a fixed duration with an upside cap. This means that if, at the end of the loan duration, the altcoin didn’t exceed the upside cap, the lender gets back their tokens; otherwise, they get converted at the strike price. As of May 2024, MYSO has facilitated around $2 million in organic covered call transactions. These transactions are detailed on the MYSO DApp stats page.
Benefits include:
Utilizing Idle Tokens: users can capitalize on idle tokens without having to sell
Cost efficiency: in case a conversion happens, covered calls don’t incur swap fees or market impact; this can be useful for e.g. treasuries looking to diversify into stables over time
Instant revenue: revenue is received immediately and generated in stablecoins
Trustless settlement: settlement happens without counterparty risk
Personalization: covered calls can be customized to ideally meet the unique needs of the user
Transparency: settlement happens transparently on-chain
How to do covered calls on MYSO
Step 1: Decide which token you’d like to lend. Check out this list of tokens for inspiration: List of tokens.
Step 2: Get indicative quotes using Captain Yield Bot: Captain Yield Bot. Example: If you wanted to lend the Ethena token (ENA) - you can use the command
/quotegrid ethenato see what you could earn.Step 4: Get a firm quote.
Step 5: Create a lender vault on MYSO Finance Vaults.
Step 6: Fund the vault with the loan amount. For example: Deposit $50k of ‘ethena’ into your vault.
Step 7: Create an on-chain offer that matches the firm quote using the helper spreadsheet: Helper Spreadsheet. The team can assist with this.
Step 8: Done. Once matched, you’ll immediately have your USDC upfront premium available in your vault to claim.
How does a covered call work? The diagram shows the returns from a covered call strategy compared to just owning the token directly. Owning the token yields a linear return profile (blue line): a +10% rise in the token’s price translates to a +10% profit, and a -10% fall results in a -10% loss.
In contrast, by employing a covered call strategy, the token holder earns an initial premium for selling a call option, which results in immediate revenue (i.e. Upfront Premium). The covered call payoff line (green line) also follows a linear shape but only up to the upside cap, beyond which the gain is capped.
This means that in all cases where the token price remains below the upside cap, the outcome of the covered call strategy will always be better. Only when the price exceeds the upside cap would holding lead to a better outcome.
Illustrative Example
For instance, assuming a covered call with a 120% strike, a 4.5% upfront fee, and a 0.5% protocol fee, if a user was doing a covered call for $100,000 in XYZ altcoin and matched with an institutional trading firm, the trading firm would be sending $126,400 in stablecoins to borrow the aforementioned $100,000 of XYZ altcoin. Of the sent stablecoin amount, around $120,000 would serve as collateral for conversion, $5,688 would be the covered call upfront premium for the lender, and $632 would be the protocol fee
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