Leveraged Strategy Vaults (Call Spreads & Put Spreads)
PsyFi has introduced a new Decentralized Option Vault (DOV) primitive, leveraged strategy vaults. These vaults give users the ability to take leveraged positions using the same collateral they would in a traditional Covered-Call or Secured-Put Vault. Leveraged vaults provide greater capital efficiency and the potential for higher returns, albeit with an adjustable risk profile. Leveraged Vaults take deposits of a variety of tokens, and write credit call/put spreads against them. In a credit spread, the writer of the strategy receives a net credit by selling an option closer to the money, and buying an option slightly farther away from the money. Since, the maximum loss of a call/put spread is limited by the long option position of the strategy, a single token can write multiple options and still remain fully collateralized.
Example of P&L of Call-Spread
Point A represents the option sold closer to the money, while Point B represents the option purchased to limit the risk of the strategy.
When To Use Leveraged Strategy Vaults
- When user is moderately bearish/bullish, leveraged strategy can be used to boost returns versus traditional DOVs while staying in the underlying token of your choice.
- When user wants to increase their capital efficiency while selling options to generate returns.
- If a user wants to cap their potential losses, they can use Leveraged Strategy Vaults with no leverage.
Benefits of Leveraged Strategy Vaults
Traditionally invididual users would have to use a centralized venue to build their call/put credit spreads, leading to crossing of two bid/ask spreads on the orderbook. PsyFi's strategy vaults eliminate the need for crossing spreads, and generate superior returns for the strategy by auctioning the strategy as a single structure.
On traditional options trading venues, users have to post collateral to sell options leaving their position open to the risk of liquidation. Since PsyFinance's strategy vaults are fully collateralized, there is no liquidation risk even if users select maximum leverage.
Additionally, the leveraged strategy vaults operate on a rolling week to week basis each epoch, so the user saves time using PsyFinance versus manually creating positions week to week.
Currently PsyFi Leveraged Vaults come in three varieties, Low, Medium, and High leverage.
BTC Put Leveraged Vault showing three different leverage options
Low leverage means strategies with no leverage. No leverage Call/Put Credit Spread strategies limit users losses with the tradeoff of reduced returns.
Medium leverages generally has leverages from 2-3x the initial position. While High leverage is the maximum leverage the vault allows. High leverage is risky as the user runs the risk of losing nearly their entire position , if the long leg of option strike is reached. NOTE: Leverage is fundamentally risky and should be only used by sophisticated users who understand the strategies risk profile.
Other risks users are exposed to are oracle & smart contract risks. PsyFi uses only large cap assets in its strategy vaults and Pyth oracles to determine option profit and loss at expiry. These assets have high liquidity and a contain large number of Pyth oracle data providers (15+), reducing the chance of oracle manipulation. Additionally, PsyFi's strategy vaults are audited by Kudelski to reduce the risk of smart contract exploits. Existing audits already have been completed on the PsyOptions Euro protocol where the collateral is held.
User's collateral is stored on the PsyOptions Euro's option protocol and not held with any counterparties that purchase the options, thereby limiting counterparty risk.