Why Hodl when you can Yiedl™ ?

How to earn a yield on your holdings, using covered calls.

Summary

• You can use your holdings to sell covered call options, and earn yields.
• Charm.fi has the largest selection of covered calls in Defi.
• The yields are safer, the closer it is to settlement date.
• If you hold ETH or WBTC and believe the market price will not increase too much on settlement date, you can earn yields in ETH or WBTC by purchasing a ‘Sell Call’ at Charm.fi.
• If you hold USDC and believe the market price of ETH or WBTC will not decrease too much on settlement date, you can earn yields in USDC by purchasing a ‘Sell Put’ at Charm.fi.

** When earning yields using covered calls, you may miss out on some of the gains in ETH or WBTC if their price increases too much; or be exposed to losses in your USDC holdings if the price falls too much. Therefore, please only use covered calls if you think the price will not be too volatile.

Introduction

Charm recently generated $2.5m of volume, less than 2 weeks after hitting our $1m milestone. A large part of this volume was due to users selling covered calls, with many earning yields up to 20% in the markets that have expired before 5th February 2021. Selling covered calls can therefore be a great way to earn yields, and selling covered calls at Charm.fi is affectionately known as:

Yiedling

And earning yields from yiedling is known as:

Yiedl

At Charm.fi, users can yiedl by either purchasing ‘Sell Calls’ in ETH, or purchasing ‘Sell Puts’ in USDC.

What are covered calls?

Covered calls are an options strategy where a user buys or deposits an asset, and simultaneously write a call or put option on that asset. When users write an option, they are selling that option and receiving the proceeds from the sale. This proceed is called the premium, and is equal to the purchase cost of the option that was written. The steps to create a covered call strategy is summarised in the following diagram:

To create a covered call using the underlying asset (eg WBTC), a holder will 1. Buy or deposit the underlying asset (eg WBTC), 2. Write a call option on that asset, and 3. receive the premium from writing the option. The outcome is the payoff profile in 4. Covered Call Payoff. The covered call holder will receive the premium as a yield, but will miss out on any gains if the price of the underlying increases above the strike price.

When buyers creates an options strategy as per the above, they are ‘selling covered calls’, because they are creating (or writing) a call or put option, and then selling them to the market so that other users can purchase them.

What are ‘Sell Calls’

Sell Calls’ are a type of covered calls offered by Charm.fi where users can earn yields in the underlying asset (eg WBTC, ETH). When a user purchase a ‘Sell Call’, they are actually depositing WBTC (for example) of a particular size (ie the Option Size). A call options will then be sold on the WBTC deposits, from which a user will receive a premium in WBTC. The net amount deposited is the Option Size minus premium, and this is the ‘Total Cost’ paid by the user. Therefore:

Total cost of ‘Sell Calls’ = Option Size minus Premium

For example (please also refer to screenshots below taken from Charm.fi):

If you want to buy ‘Sell Calls’ with a strike price of $52,000, with an option size of 1, the Total Cost you will pay is 0.9466 WBTC and you will get back 1 WBTC if the settlement price is less than $52,000.

The premium is therefore 0.0534 WBTC (1–0.9466).

The yellow box will tell you your maximum yield is 5.63%, which is earned from the premium:

Your actual yield depends on the settlement price. If it is more than 5.63% above $52,000 (ie $54,928), you will not get a yield. If it is less than $54,928, you will get a yield, and you will get the maximum yield of 5.63% if the WBTC price is below $52,000.

Therefore, users should only purchase Short Calls using their WBTC holdings, if they believe the settlement price will not rise significantly above the strike price.

What are ‘Sell Puts’

‘Sell Puts’ are a type of covered calls offered by Charm.fi where users can earn yields in USDC. When a user purchase a ‘Sell Put’ using USDC, it will be used to buy WBTC (for example) of a particular size (ie the option size). A put options will then be sold on the WBTC bought, from which a user will receive a premium in USDC. The total cost (in USDC) to the buyer is the net cost of this transaction, as described below:

Total Cost of ‘Sell Puts’ = Option Size * Strike Price minus Premium

For example (please also refer to screenshots below taken from Charm.fi):

If you want to buy ‘Sell Puts’ with a strike price of $56,000, with an option size of 0.1, the Total Cost you will pay is 5,266 USDC and you will get back 5,600 USDC if the the settlement price is more than $56,000.

The premium is therefore 334 USDC (56000*0.1–5,266).

The yellow box will tell you your maximum yield is 6.334%, which is earned from the premium.

Your actual yield depends on the settlement price. If the settlement price is more than 6.334% below $56,000 (ie $52,453), you will not get a yield. If it is more than $52,453, you will get a yield, and you will get the maximum yield of 6.334% if the WBTC price is above $56,000.

Therefore, users should only purchase Sell Puts using their USDC, if they believe the settlement price will not decrease significantly below the strike price.

How can I capture the highest possible yield

The above shows that, there are opportunities for high yields if you believe the settlement price will not increase or decrease significantly from the strike price on settlement date.

To earn a yield, you can:

1. Monitor the market price of the underlying (eg WBTC, ETH).
2. If you believe the market price will not decrease significantly below a strike price, purchase a ‘Sell Put’ at that strike price. Please also keep an eye on the yield in the yellow box, which indicates your maximum yield.
3. If you believe the market price will not increase significantly above a strike price, purchase a ‘Sell Call’ at that strike price. Please also keep an eye on the yield in the yellow box, which indicates your maximum yield.

In general, because there is more certainty on where the market price will land as it approaches the settlement time, the yields of Sell Calls or Sell Puts usually decrease as they gets closer to settlement. However, this may not always be the case, which means there will always be opportunities to earn very high yields at charm.fi.

Conclusion

Charm.fi offers a different, and potentially lucrative way to earn yields by Selling Covered Calls, if you believe the settlement price will not change too much from the strike price. You can earn yields in ETH or WBTC by purchasing ‘Sell Calls’ using ETH or WBTC, and in USDC by purchasing ‘Sell Puts’ using USDC.

Covered calls offered by Charm are priced by the market and as such, there will always be good opportunities to earn yields in USDC, WBTC, and ETH. There are currently 32 different covered calls available at Charm.fi, covering 9 strikes prices for the ETH markets and 7 for WBTC. These covered calls expire in 2 days time, so there are still plenty of time to earn yields for everyone.

With so many options for yiedling at Charm.fi, are there any reasons not to yiedl ?

: )

You can try yiedling at Charm.fi, and earn yields using ‘Sell Calls’ and ‘Sell Puts’.

If you have any questions, feel free to ask them in our Discord or Telegram.

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