Complex option strategies

Continuing our backtesting galore

Published in

Neuron

4 min readFeb 16, 2022

We’re always on the lookout for new strategies to implement at Neuron Pools. With that in mind, we’ve decided to continue testing options strategies after our recent short post.

Here we will test two strategies:

first one: sell underlying and buy a call option,
second one: short two OTM call options and buy one ATM call option.

Buying calls

If you can sell a call, you can definitely buy it, too!

We already tested the covered call; why not try a long call strategy?

It’s a reverse one to the short call’s adage, and easy to grasp.

0. Suppose you own 1 ETH…
1. You sell 1 ETH for USD
2. You then buy a strike ~= spot call option
3. Then you’re sending the remaining unused cash (1 ETH in USD — premium) to farming @ Curve, ~20% APY to accrue liquidity provider’s rewards.

Some additional assumptions:

You own a call option ➡️ if ETH increases in price, you’ll get a profit above the strike price, e.g. if 1 ETH is at $3000, and the price increases to 3300, you will get $(300 — premium)!
For the whole time until expiry, your (3000-premium) dollars will farm liquidity...

Seems neat, but what ‘bout the…

methodology?

For data, we’ve taken 2 years’ worth of ETH prices and implied volatility values @ Messari from Jan’2020 to Jan’2022, and option chain prices from Deribit (basically — the prices options were traded at).

The data is clear, yet what’re we simulating?

We’ve been simulating the portfolio value of a user depositing in a pool running the aforementioned strategy (buying a call option and sending the rest to a Curve LP), so the following results are in ETH {underlying asset}, yet USD-denominated!

results?

Alas, it’s lots worse than a simple buy&hodl:

Final amounts from 2020-01-03 to 2022-01-14:
Strategy: 491.11
Buy&Hold: 3267.08

Basically, our mighty (little) portfolio of 1 ETH would be worth almost $3300 holding and about $500 buying calls… One of the (possible? definite?) reasons is high implied volatility on ETH ➡️ subsequent high option prices.

Most of the time the option contract’s price is higher than our income.

Multi-leg strategy🌕

“Almost before we knew it, we had left the ground.”
(A Trip to Venus, by John Munro)

We’re improving capital efficiency here after all, eh? Now it’s time to move on to more complex structured products.

What are those?

A structured product is, simply put, a financial instrument whose performance is linked to some base asset, e.g. Ethereum.

Defining a structure

We were testing the following combination:

Owning the asset (say, the same 1 ETH priced at $3000)
Buying a call with the closest strike ~= price
Selling two out-of-money calls (we’ve been using +15% from the current price)

The results

Finally, something marginally better than just holding Ethereum, considering we’ve just been using one contract, a-and our portfolio values are as follows:

Final amounts from 2020-01-03 to 2022-01-14:
Structured product: 	 5494.03
Buy&Hold: 		 3267.08

So if a user owned 1 ETH in Jan’2020, in January 2022 his ETH would be worth $3267. But with double short call strategy, the same $3267 position opened in Jan 2020 will be equal to~$5500, 68.2% more!

P&L charts for the initiated

Some of you may remember our late options’ article where we’ve been pondering on the nature of P&L chart for some options strategies. Well, here’s the corresponding chart for our structured product compared with just hodling. Please note the sharp rise on the 0…+5% price change range — it’s what makes it so lucrative (most of the time, we’re anticipating small price increases).