Automated Squeeth Strategies: The Crab Strategy Is Now Live 🦀
(Acknowledgements: Joe Clark, Tammy Fisher, and Andrew Leone for feedback & revisions)
Squeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeth
A few weeks ago, Opyn launched Squeeth, a DeFi-native option that removes strikes and expiries. One of the greatest benefits of options is their versatility. Traders can deploy distinct options strategies for any market condition or view, including periods when the underlying asset price trades sideways.
A sideways market, sometimes called a crab market, refers to when asset prices fluctuate within a relatively narrow range for an extended period of time without trending significantly up or down.
Today we are launching the Crab Strategy, a simple way to earn Squeeth funding on ETH deposits with one click.
The Crab Strategy contract handles deposits & withdrawals, and automatically modifies its mixture of Squeeth debt & ETH collateral to create a position with an approximate delta of 0 to the price of ETH (neutral exposure to ETH).
The strategy is ideal for sideways market conditions when the price of ETH fluctuates within a relatively stable range with periods of low volatility.
Crab Strategy Overview
The Crab Strategy allows depositors to collect funding without being short ETH. The vault pairs short Squeeth with long ETH to create a position with an approximate delta of 0 to the price of ETH.
The Crab Strategy is similar to selling a continuous straddle that resets periodically to be at-the-money. This strategy is short Squeeth, which is how funding is earned. At each rebalance, the strategy is also long an amount of ETH that cancels out the Squeeth exposure to the price of ETH, leading to an approximate delta of 0 to the price of ETH. The strategy rebalances on a time-based or price threshold to maintain this 0 delta exposure, meaning the positions frequently reset to having 0 ETH exposure. The Crab Strategy has constant negative gamma exposure.
The Crab Strategy is:
- A vault with Squeeth debt and ETH collateral
- A mechanism to issue and redeem LP shares that are a claim on the collateral and an obligation to debt
- A mechanism to hedge ETH exposure by trading ETH for Squeeth
Immediately after a hedge, a crab vault will have a payoff something like this:
Crab Strategy Profitability
The maximum payoff is if the ETH price remains constant.
The Crab Strategy is profitable between rebalances as long as ETH moves less than an amount based on the funding received from the short Squeeth position. In other words, the Crab Strategy takes the view that volatility will be low. Put differently, the strategy takes the view that current implied volatility is too high, or that volatility will be lower than the market believes. If ETH goes up or down less than the amount of implied volatility (vol/sqrt(365) to be exact) in a single day, the strategy makes money, subject to transaction fees, slippage, and other costs. The strategy rebalances daily, or upon a large move in the price of ETH, to be delta neutral by buying or selling ETH vs. Squeeth.
This is a classic ‘short volatility’ position that will benefit if the realized volatility of the ETH price is lower than the market expectation.
Hypothetical Crab Strategy Payoff:
Crab Strategy Risks
If ETH moves more than an amount that is based on the funding received from the short Squeeth position the strategy is unprofitable on that day. In other words, the Crab Strategy takes the view that volatility will be low. If ETH goes up or down more than the amount of implied volatility (vol/sqrt(365) to be exact) in a single day, the strategy loses money. If the Squeeth premium to ETH increases, the strategy will incur a loss because it will be more expensive to close the position.
If the Crab Strategy falls below the safe collateralization threshold (150%), the strategy is at risk of liquidation. Rebalancing based on large ETH price changes helps prevent a liquidation from occurring.
Crab Strategy Tutorial
To deposit ETH into the Crab Strategy:
- Go to: https://squeeth.opyn.co/strategies
- Enter the amount of ETH in the trading card, select deposit, and confirm with MetaMask
To view your Crab Strategy position, go to the Positions tab
To withdraw ETH from the Crab Strategy:
- Go to: https://squeeth.opyn.co/strategies
- Select the withdraw tab on the trading card
- Enter the amount of ETH, select withdraw, and confirm with MetaMask
To view your Crab Strategy transaction history, go to the Positions tab or the Strategies tab
Crab Strategy Recap
- Position: short Squeeth, long ETH, locally no exposure to price of ETH
- Rebalancing: rebalances to locally have no exposure to price of ETH daily or when large moves in ETH price
- View: ETH will move less than is implied by the vol level that Squeeth is priced at. In other words, the average squared return is less than funding.
- Profile: locally no exposure to price of ETH
- Profitable: when ETH moves less between rebalances than a % move that is implied by the funding realized by the short Squeeth position (subject to transaction fees, slippage, and other costs)
- Unprofitable: when ETH moves more between rebalances than a % move that is implied by the funding realized by the short Squeeth position (subject to transaction fees, slippage, and other costs)
- Liquidation: If the Crab Strategy falls below the safe collateralization threshold (150%), the strategy is at risk of liquidation
Building on Top of Squeeth 🏗️
Opyn’s goal is to enable any protocol or developer to utilize Squeeth’s infrastructure. Squeeth has many powerful use cases and we want to make it as easy as possible for teams to integrate with Squetth’s core contracts. If you’re a developer or a builder, let’s build the Squeethcosystem together! Reach out if you’re a:
- Team building active or passive yield strategies
- Active Uniswap v3 liquidity manager
- Arb bot devs or quant traders
- Lending protocol
- Creative builder with your own idea
For Automated Squeeth Strategies, there will be a few Opyn foundational strategies (Crab: neutral exposure to ETH, Bull: positive exposure to ETH , Bear: negative exposure to ETH), but integration teams can adjust any parameter of the trading strategy to create their own strategies or build their own novel strategy with different mechanism, triggers, etc.
Example parameters for adjusting Automated Squeeth Strategies could be: how often the strategy trades / hedge frequency, how much of its delta does it trade, auction params, etc.). Could also have some signal based trading strategies too (if RV*1.5<IV, sell squeeth, trade in or out depending on IV vs market, or similar ideas).
Power Perpetuals are still in their infancy, but we have been studying them in depth since their inception (July 9, 2021!) and remain extremely excited about their potential.
If you are as intrigued by this new primitive as we are, we would love to hear from you. You can join the Opyn Discord, email us squeeth@opyn.co or DM Opyn.
Disclaimer: This post is for general information purposes only. It’s also just an elaborate plan to get people to say a funny word. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. This post reflects the current opinions of the authors and is not made on behalf of Opyn or its affiliates and does not necessarily reflect the opinions of Opyn, its affiliates or individuals associated with Opyn. The opinions reflected herein are subject to change without being updated.
