Introducing Exotic Options — Butterfly and Covered Call Option
Go to App: https://app.lien.finance/
Some of you may recall us teasing the possibility of slicing and dicing LBT (Leveraged Bond Token) into smaller pieces in our previous blog post.
Now we are ready to deliver.
Today we are introducing options that are exotic, hence the name, Exotic Options.
Our current product, LBT Lite — Call, is created as an at-the-money call option by carving the relevant portion out from the original LBT (Leveraged Bond Token).
With Exotic Options, we’ve made it possible to create interesting options from what remains after carving LBT Lite — Call out of LBT.
The Exotic Options smart contracts and the updated Generalized & Decentralized OTC smart contracts have been audited by Certik (full audit report).
Butterfly Spread 🦋
How to make money with the Butterfly Option: If you think that the market will be stable, buy the Butterfly Option
A P&L of a Butterfly Option looks something like this.
Payout is the highest when the price of the underlying equals the strike price of the option at expiry.
Payout decreases as the price of the underlying moves further away from the strike price.
When the price of the underlying reaches n, the payout becomes zero.
Volatility Long Strategy (Straddle)
How to make money with the Volatility Long Strategy: If you don’t know which direction the market is going, but think that the volatility of the underlying will increase, deploy the Volatility Long Strategy
This strategy is the opposite of the Volatility Short Option.
By combining a call and put (buy) with the same maturity and strike price, you can bet on the market being volatile, without knowing the direction it’ll go.
We introduced this strategy in our blog a while back.
With the introduction of the Butterfly Option, you now have additional weapons in your arsenal to deploy from based on the market environment.
Capped Leverage Option (Covered call)
The Capped Leverage Option is mostly identical to the original LBT (2x leveraged long).
The difference is that it has a cap which limits its upside but comes with a lower option premium.
We believe the probability of incurring any meaningful economical demerit from this “cap” is remote to negligible as the cap won’t be reached in most cases (i.e. the cap for an option created when the price of the underlying is $1,000 would be around the vicinity of $1,500).
Generalized & Decentralized OTC.sol
The Decentralized OTC Contract is the smart contract that is currently being used to trade LBT Lite.
It automatically prices LBT Lite based on price feeds from Chainlink.
We have upgraded this smart contract to automatically price any type of option, regardless of how it is created and calculate the appropriate fee.
The new Generalized & Decentralized OTC.sol smart contract that we have created makes Exotic Options possible.
The Road to iDOL V2
In order for the iDOL stable coin to function as intended, there needs to be sufficient liquidity for LBT.
This is because iDOL and LBT are like twins that have opposite personalities but are dependent on each other to survive.
When we launched iDOL V1, the demand for iDOL significantly overwhelmed the demand for LBT and was showing early signs of strain on the efficiency of the system.
Even if we had continued with V1, it may have led to an inefficient market.
With this insight in mind, we made it a priority to work on ways to improve the liquidity of LBT.
With the release of LBT Lite (at-the-money call option), we observed higher than expected demand from the market.
The Exotic Options that we are releasing today are made from other parts of LBT after carving out LBT Lite.
If the market has demand for these options, we can determine that there is sufficient liquidity to split ETH into LBT and SBT (Solid Bond Token) and create iDOL from SBT.
As next steps, we’ll release the functionality to allow users to create and sell options.
After testing the waters with this function and the new option instruments, we’ll determine whether the time is right to relaunch iDOL.
