MYSO & Evmos Treasury debut Covered Call Strategy

MYSO & Evmos Treasury debut Covered Call Strategy.

MYSO is excited to share that, together with the Evmos Treasury, we have successfully completed the first-ever natively settled Evmos covered call transaction. The covered call was settled fully on-chain on Evmos with 1,125,000 wrapped Evmos (loan leg) and $100,000 Noble USDC (collateral leg). The transaction demonstrates the potential of combining primitives from both DeFi and TradFi, and how structured product concepts can be brought to life on-chain on Evmos.

The Evmos Treasury is taking an active stance on innovative treasury solutions and leading by example in how treasuries across the entire Cosmos ecosystem can take advantage of structured products as part of their treasury strategy. MYSO and Evmos are excited to continue this collaboration and further grow structured products on Evmos.

Recap

On 9th of January 2024, MYSO made a proposal to use part of the Evmos treasury for a covered call strategy. This proposal found strong support in the Evmos community and was accepted with over 76% of votes on 14th of January to allocate an initial 2,250,000 Evmos for this. To kickstart this initiative, a first covered call for 1,125,000 Evmos was executed with the following parameters:

• Notional: 1,125,000 EVMOS (worth ~$94,000 at inception)
• Tenor: 30 days
• Strike: 110% (~$0.0919 at inception)
• Option premium: ~3.6419% (~$3,569 USDC / 44% APY)

The covered call was opened on the 27th of January 2024 and closed on the 26th of February 2024. As the final spot price closed below the strike price of $0.0919, the call option expired out-of-the-money, and all Evmos tokens were returned. The price plot below shows how the Evmos price evolved during the covered call duration.

Illustration of Evmos Price, Strike Price and Break-Even Price during the Covered Call.

The black line represents the Evmos price, and the blue line highlights the covered call position value as min(Evmos Price + Premium, Break-Even Price). We can observe that during the covered call tenor, the Evmos price mostly stayed below the strike price, only briefly breaking it intra-day on the 26th of February before falling again. However, the Evmos price never crossed the break-even price. This indicates that during the covered call period, the Evmos treasury consistently outperformed a hold strategy.

Looking at the overall distribution of price distances towards the break-even price, we can see that the maximum distance was ~33% and the minimum distance ~2% (see histogram below). With an average distance of about ~21% and a median distance of ~19%, we can see that the distribution was skewed towards larger distances, showhing that the covered call position consistently performed better than a hold strategy.

Distribution of Price Distances to Break-Even Price.

How did the Covered Call impact the Evmos Price?

During the open community discussion, some community members brought up concerns that lending Evmos tokens through the covered call might negatively impact the Evmos price by introducing predatory secondary market activities. We can try to get a better understanding of this by inspecting the return distributions outside and during the covered call period (see plot below).

Distribution of Evmos Returns during and outside of the Covered Call Period.

To quantify whether there’s any statistical difference between the two distributions, we can use a Kolmogorov-Smirnov test. Computing the resulting KS-statistic=0.14976525821596245 and p-value=0.4935502644254509, we need to reject the null hypothesis that the return distributions significantly differ from one another. Below is also a plot showing the cumulative distribution function of the null hypothesis (returns outside of the covered call period as shown by the red line) vs the alternative hypothesis (returns during the covered call period as shown by the blue line).

Cumulative Evmos return Distributions outside and during the Covered Call period.

Outlook

With the first Evmos Covered Call having been successfully settled, we look forward to continuing the collaboration with the Evmos treasury. Taking into account the community’s feedback, a follow-up Covered Call with again 30 days tenor but a slightly higher strike of 120% is planned. To sum up, the collaboration between MYSO and Evmos serves as a great stepping stone to pioneer innovative treasury solutions on Evmos. Not only can this help the Evmos treasury to get access to new sustainable yield sources, but it can also serve as an example for third-party DAOs in the wider Cosmos ecosystem to explore Covered Call strategies and settle through Evmos as well.