The Best Market Conditions to Squeeth
(Acknowledgements: Joe Clark for feedback and revisions, Figma for embarrassing me as a semi-professional graphic designer)
Squeeth. Squeeth. Squeeth. A lot of people are talking about the Squeeths! But what market conditions are the best time to Squeeth? This article explains the ideal market conditions to:
- Long Squeeth
- Short Squeeth
- Crab Strategy
- Buy + LP
- Mint + LP
To use Opyn’s Squeeth Dapp 👉 https://squeeth.opyn.co/
Squeeth review
Squeeth is a DeFi-native derivative that gives exposure to the squared price of ETH. Owning oSQTH has a payoff that increases quadratically as the ETH price increases. It’s a way to make a leveraged bet on ETH, where leverage increases as the price increases, without risking liquidation.
For an in-depth explanation of Squeeth, check of the Squeeth Primer.
Long Squeeth
- Payoff Profile: ETH²
- Cost: Daily Premium (i.e. in-kind funding)
- Max Gain: Unlimited
- Max Loss: Limited (amount deposited to buy oSQTH)
- Liquidation: Long Squeeth CANNOT be liquidated
Ideal Market Condition to Long Squeeth:
The ideal market condition to buy Squeeth is when a trader has conviction in the upward price movement of ETH in the short to medium-term. Squeeth (short for squared ETH) supercharges ETH, giving the derivative an ETH² payoff.
Metrics to Pay attention to:
Squeeth Implied Volatility (IV):
- The most important consideration before going long Squeeth is Squeeth’s current implied volatility.
- Implied Volatility is a forward-looking metric designed to gauge how volatile the market may be in the future (high IV signals large price swing is ahead, low IV signals price will remain stable).
- Comparing current Squeeth IV to historical Squeeth vol can help determine if it’s a relatively expensive / inexpensive time to buy.
- Ideally you would buy Squeeth when IV is low (~85%) & subsequently sell when IV is high (~125%+), (i.e. buy Squeeth when it’s inexpensive, and sell it when it’s expensive)
- If you buy Squeeth when IV is high (~125%+) & subsequently sell when IV is low (~85%), you are effectively buying Squeeth when it’s expensive, and selling it when it’s cheap. Buying high & selling low is not a good look!
- Note: IV indicates the market’s view of volatility, but it is not indicative of future IV levels.
Funding rate:
- Squeeth tracks rather than equals ETH² because longs pay a daily premium (in-kind funding) to shorts to maintain the position.
- The funding rate of Squeeth is directly related to Squeeth’s Implied Volatility (high Squeeth IV = high daily premium, low squeeth IV = low daily premium)
Value and movement of ETH:
- The most obvious impact on oSQTH returns is the value and price movement of ETH. Holding Squeeth squares your ETH upside and downside.
- Isolating ETH price movement (i.e. excluding funding), if ETH 2x, Squeeth will 4x. If ETH 3x, Squeeth will 9x.
- Long Squeeth = ETH² price exposure
Risk:
Pay attention to Squeeth funding throughout the period that you hold Squeeth. Holding a Long Squeeth position for an extended period (> 1 year), during which ETH trades sideways or goes down in value, will cause a loss in ETH² exposure due to in-kind funding paid to Squeeth sellers.
Compared to a 2x leveraged position, Squeeth will make more when ETH goes up and lose less when ETH goes down, but funding rates are expected to be higher due to exposure to pure convexity.
If you buy Squeeth, what affects oSQTH Performance? Read this thread.
Short Squeeth
- Payoff Profile: Varies based on collateralization ratio (see interactive payoff diagram)
- Income: Daily premium paid by Long Squeeth holders (i.e. in-kind funding)
- Max Gain: Limited (amount of debt from short oSQTH)
- Max Loss: Limited (amount deposited to short oSQTH)
- Liquidation: Short Squeeth positions can be partially or fully liquidated (liquidation price is based on collateralization ratio)
Ideal Market Condition to Short Squeeth:
At the recommended collateralization ratio of 200%, the ideal market condition to short Squeeth is when there is conviction the market is overpricing volatility (i.e. current Squeeth implied volatility is too high) and the price of ETH will trade sideways. More specifically, during periods when Squeeth realized volatility is less than Squeeth implied volatility.
The cumulative short Squeeth return is a function of:
- Daily premium paid by Long Squeeth holders (reduction of oSQTH debt through in-kind funding)
- ETH collateral
- Short (∆ ETH)² return
Metrics to Pay attention to:
Squeeth Implied Volatility (IV):
- The most important consideration before going short Squeeth is Squeeth’s current implied volatility.
- Implied Volatility is a forward-looking metric designed to gauge how volatile the market may be in the future (high IV signals large price swing is ahead, low IV signals price will remain stable).
- Comparing current Squeeth IV to historical Squeeth vol can help determine if it’s a relatively expensive / inexpensive time to sell.
- Ideally you would sell Squeeth when IV is high (~125%+) & subsequently buy it back when IV is low (~85%) (i.e. you are effectively selling Squeeth when it’s expensive, and buying it back when it’s cheap)
- If you sell Squeeth when IV is low (~85%) & subsequently buy it back when IV is high (~125%+), you are effectively selling Squeeth when it’s inexpensive, and buying it back when it’s expensive. Selling low & buying high is not a good look!
Funding rate:
- Short Squeeth sellers receive premium income (in-kind funding) due to negative exposure to pure convexity.
- In-kind funding for being short Squeeth reduces the amount of debt owed by a short Squeeth position.
- The funding rate of Squeeth is directly related to Squeeth’s Implied Volatility (high Squeeth IV = high daily premium, low squeeth IV = low daily premium)
Value and movement of ETH:
- One obvious impact on short oSQTH returns is the value and price movement of ETH.
- Because short Squeeth positions are collateralized with ETH, the total return of a short oSQTH position should take into account the ETH returns of the over-collateralized portion of the position.
Risk:
The biggest risk to a short Squeeth position is a quick, large move up in the price of ETH due to the possibility of being liquidated. If the price of ETH continues to increase, short sellers will need to add collateral to avoid being liquidated.
On the other hand, if ETH price decreases, the value of the short Squeeth position’s collateral will decrease, though this will be partially offset by the gain from being short ETH².
Since selling Squeeth exposes a trader to liquidation risk, it’s important to monitor the liquidation price set by the minimum collateralization threshold (150%).
Crab Strategy
- Payoff Profile: Upside down smile 🙃 (i.e. a hill, and you make the most money when you’re on top of the hill)
- Income: Daily premium paid by Long Squeeth holders (i.e. in-kind funding)
- Max Gain: Limited (amount of debt from short oSQTH)
- Max Loss: Limited (amount deposited to short oSQTH)
- Liquidation: While it’s possible for crab strategy positions to be liquidated, it’s unlikely due to automatic rebalances
Ideal Market Condition:
Crab Strategy is ideal for sideways market conditions (crabs move from side to side, get it?!) when the price of ETH fluctuates within a relatively stable range with periods of low volatility. More specifically, the Crab Strategy does best during periods when Squeeth realized volatility is less than Squeeth implied volatility.
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).
Profits in USD:
Crab strategy aims to be profitable in USD terms. When the price of ETH rises, it tends to sell ETH off, trying to maintain its $ value.
Accumulating ETH:
Another benefit of crab is that it can stack ETH in a bear market. Since it aims to gain value in USD, when ETH goes down it tends to accumulate more ETH.
*note, because the Crab Strategy does best during periods of low volatility, the price of ETH could rise significantly from deposit until withdrawal, but without much volatility on the path, the Crab Strategy would do well because fundamentally it’s receiving funding while staying within the profitability threshold.
Metrics to Pay attention to:
Squeeth Implied Volatility (IV):
- The most important consideration before depositing in the Crab Strategy is Squeeth’s current implied volatility. This is because Squeeth’s Implied Volatility sets the crab profitability threshold.
- Implied Volatility is a forward-looking metric designed to gauge how volatile the market may be in the future (high IV signals large price swing is ahead, low IV signals price will remain stable).
- The strategy takes the view that current implied volatility is too high, or that realized volatility will be lower than the market believes (IV).
- If ETH goes up or down less than the amount of implied volatility (vol/sqrt(365) to be exact) between rebalances, the strategy makes money, subject to transaction fees, slippage, and other costs.
- If you deposit into the Crab Strategy when IV is low (~85%) & subsequently withdraw when IV is high (~125%+), you are effectively selling Squeeth when it’s inexpensive, and buying it back when it’s expensive. Selling low & buying high is not a good look!
Current Crab Profit Threshold:
- The crab profitability threshold indicates the ETH price range between rebalances that would result in a profitable period.
- Based on current Implied Volatility (funding), the crab strategy would be unprofitable if ETH moves more than approximately the profit threshold in either direction each day.
Price Impact (slippage)
- Slippage happens when a trader makes a trade, and the price is higher or lower than expected (for both buying and selling).
- Two primary reasons tend to cause slippage: Volatility & Liquidity.
- Volatility: Transactions take time to make it on-chain. The final price might differ from the expected price
- Liquidity: liquidity refers to the ease that oSQTH can be traded without affecting its market price. The lower oSQTH’s liquidity, the higher risk a trade will be affected.
Risk:
The two biggest risks for Crab Strategy deposits are:
- If you deposit into the Crab Strategy when IV is low & subsequently withdraw when IV is high
- if ETH moves more than approximately the profit threshold in either direction between rebalances.
While Crab Strategy deposits can be liquidated, automatic rebalancing on a time-based or ETH price changes threshold helps prevent a liquidation from occurring.
For more details on Opyn’s Crab Strategy, check out this article.
Buy + LP Squeeth
- Payoff Profile: ETH^1.5
- Cost: Daily Premium of oSQTH portion of LP (i.e. in-kind funding, you have less exposure to funding than holding 100% Squeeth.)
- Income: SQTH-ETH Uniswap Pool Fees
- Max Gain: Unlimited
- Max Loss: Limited (amount deposited to buy + LP)
- Liquidation: Buy + LP positions CANNOT be liquidated
Ideal Market Condition to Buy + LP Squeeth:
The ideal market condition to Buy + LP is when there is ETH price appreciation that exceeds funding paid for the long Squeeth portion of your LP (Squeeth funding needs to beat realized volatility). In short, you want the price of ETH to go up with high volatility, in addition to high trading volume in the SQTH-ETH Uniswap pool. Buy + LP positions do well even if ETH increases significantly.
A full range Buy + LP position is similar to an ETH¹.5 payoff (squeeth-lite), excluding funding and trading fees. You have less exposure to funding than holding 100% squeeth.
The Buy + LP position accumulates more ETH as the price of ETH increases. Alternatively, if the price of ETH decreases, the LP position accumulates more oSQTH and reduces its % holding of ETH.
When does it make sense to Buy + LP Squeeth?
- High trading volume in the SQTH-ETH pool
- Price increases of ETH outperform funding on oSQTH (but a trader might not be as bullish as wanting to go long 100% oSQTH)
- Desire convex exposure to ETH
- Think funding is relatively low relative to potential ETH moves
Metrics to Pay attention to:
Squeeth Implied Volatility (IV):
- The most important consideration before going long Squeeth is Squeeth’s current implied volatility.
- Implied Volatility is a forward-looking metric designed to gauge how volatile the market may be in the future (high IV signals large price swing is ahead, low IV signals price will remain stable).
- Comparing current Squeeth IV to historical Squeeth vol can help determine if it’s a relatively expensive / inexpensive time to buy + LP.
- Ideally you would buy Squeeth + LP when IV is low (~85%) & subsequently sell when IV is high (~125%+), (i.e. buy Squeeth when it’s inexpensive, and sell it when it’s expensive)
Funding rate:
- Squeeth tracks rather than equals ETH² because longs pay a daily premium (in-kind funding) to shorts to maintain the position.
- The funding rate of Squeeth is directly related to Squeeth’s Implied Volatility (high Squeeth IV = high daily premium, low squeeth IV = low daily premium)
- Traders who Buy + LP will pay funding on the portion of their LP that is long Squeeth.
Value and movement of ETH:
- The most obvious effect on Buy + LP returns is the value and price movement of ETH. A full range Buy + LP position is similar to an ETH¹.5 payoff, excluding funding and trading fees
SQTH-ETH Pool Trading Fees
- Monitoring SQTH-ETH trading fees is important because LP fees are an important PnL consideration (LP fees should exceed impermanent loss)
Price Impact (slippage)
- Slippage happens when a trader makes a trade, and the price is higher or lower than expected (for both buying and selling). This typically happens for larger trade sizes.
- Two primary reasons tend to cause slippage: Volatility & Liquidity.
- Volatility: Transactions take time to make it on-chain. The final price might differ from the expected price
- Liquidity: liquidity refers to the ease that oSQTH can be traded without affecting its market price. The lower oSQTH’s liquidity, the higher risk a trade will be affected.
*note: The choice of Buy + LP vs. Mint + LP really depends on your view of funding, ETH price trajectory and if you want convex or concave exposure.
Risk:
Pay attention to Squeeth funding throughout the period that you plan to Buy + LP Squeeth. If the price of ETH decreases, the LP position will accumulate more oSQTH, resulting in higher funding paid.
For a more detailed explanation of Buying + LP Squeeth:
- Demystifying Squeeth LPing by Andrew Leone
- Buy + LP Giga Thread by Andrew Leone
- Buying & LP the oSQTH-ETH pair by Regan O’Malley
- Flashloans in the Squeeth Ecosystem by Joe Clark
Mint + LP Squeeth
- Payoff Profile: Similar to a covered call (initial exposure similar to being long 1x ETH)
- Income: SQTH-ETH Uniswap Pool Fees
- Max Gain: Limited, dependant on LP range, collateralization ratio, and trading fees
- Max Loss: Limited, dependant on LP range, collateralization ratio, and trading fees
- Liquidation: Mint + LP Squeeth positions can be partially or fully liquidated if the price of ETH increases too much (liquidation price depends on LP range)
Ideal Market Condition:
The ideal market condition to Mint + LP is when there is ETH price appreciation and high trading volume in the SQTH-ETH pool. You want the impact of ETH price increases to slightly exceed funding, but you may not be as bullish as someone who chooses to Buy +LP. Mint + LP positions give up some ETH upside and take on more ETH downside in exchange for earning trading fees generated from the SQTH-ETH pool.
*note: Minting oSQTH is similar to borrowing oSQTH
When does it make sense to Mint + LP Squeeth?
- High SQTH-ETH pool trading volumes
- Want to be long ETH, but are less bullish than Buy + LP Squeeth (ETH¹.5 payoff)
- Don’t want to be initially paying funding
- Fine with ETH upside being reduced in exchange for earning trading fees from the SQTH-ETH pool
- Want leverage and capital efficiency for higher fees / $
Capital Efficiency of Mint + LP
Mint + LP users will automatically deposit their uniswap LP NFT as collateral in their vault to increase their liquidation price or reduce ETH collateral required.
It is possible to have a vault with 0 ETH collateral if you deposit the NFT, which can improve capital efficiency.
By Minting + LPing, you can get up to ~2x leverage on a full range LP by depositing the NFT as collateral, which can make Mint + LP more attractive on a return/$ basis.
More details: Superfluid Collateral for Squeeth in the Uniswap Pool by Joe Clark
*note: The choice of Mint + LP vs. Buy + LP really depends on your view of funding, ETH price trajectory and if you want convex or concave exposure.
Risk:
The biggest risk to a Mint + LP position is a quick, large move up in the price of ETH. If the price of ETH continues to increase, Mint + LP will need to add collateral to avoid being liquidated.
On the other hand, if ETH price decreases, the value of the Mint + LP position’s collateral will decrease, though this will be aided by increased funding earned by the short Squeeth position within the LP.
For a more detailed explanation of Minting + LP Squeeth:
- Demystifying Squeeth LPing by Andrew Leone
- Mint + LP Giga Thread by Andrew Leone
- Superfluid Collateral for Squeeth in the Uniswap Pool by Joe Clark
- To Mint or Buy & LP Squeeth? by Regan O’Malley
- Flashloans in the Squeeth Ecosystem by Joe Clark
About Opyn
Opyn is building DeFi-native derivatives and options infrastructure. Opyn’s product Squeeth (squared ETH) is a new financial derivative that gives traders perpetual exposure to ETH². Opyn’s gamma protocol serves as the infrastructure for DeFi protocols to build structured products with underlying options strategies.
Check us out at Opyn.co, follow us on Twitter, Discord, Medium
