On June 2nd we did a demo release on Polygon featuring MATIC and LINK put options. In this post, we take a look at what happened in the AMM during the option life cycle with an emphasis on LP returns during the trading window and draw conclusions based on data we gathered with The Graph.
MATIC — Pool Demo Experiment
The MATIC put option had a strike price of $1.70 and expired in the money (ITM) last week, on June 11th. The first liquidity provider (LP) deposited 1764 MATIC put options (Token A) and 2000 USDC stablecoins (Token B). The initial implied volatility was set to 275% at which point the interaction of traders through buying and selling on the AMM took over the dynamics of implied volatility from there (for more information on how the pricing algorithm works see here). The put option was priced at $0.22 cents according to Black Scholes at the moment of the first liquidity provision.
Over the course of the week, there was an increase in liquidity provision from the initial 1764 Token A and 2000 Token B contribution to over 9000 for Token A (MATIC) and 5000 for Token B (USDC) by our users who elected to become LPs. We note that around event 350 (Friday, June 4th, 2021), the price of the underlying breached the strike price of $1.70 as seen below.
The option price fluctuated around $0.22 and increased whenever the underlying price declined, as is evidently closer to the end of the expiration ($0.31), or when implied volatility rose due to rapidly more buying on the Pods AMM ($0.29). Please mind that the implied volatility is updated whenever users buy or sell options to the AMM. Learn more about the algorithm for updating IV here.
We had a relatively large buy order at event_50 (after the first day of trading) consisting of a purchase of 430 MATIC put options by one address at the moment when there was a total balance of 1764 MATIC puts. The “mini whale” order made up nearly a quarter of the total option pool supply (430/1764). This resulted in a brief spike in implied volatility (IV) to over 400%. This whale purchase at event_50 also triggered the dynamic fees mechanism of the Pods AMM.
The dynamic fees incentivize buyers and sellers of options on Pods to buy proportionally smaller amounts relative to the total available option pool size. By doing so users’ actions have a reduced price impact on the immediate next implied volatility quote and therefore the option price of the subsequent trade. If there’s an attempt by whales or economic attackers to manipulate prices, then the dynamic fees are there to compensate LPs and discourage economic attacks by users. In this case, our LPs benefited from this “mini whale” order while IV briefly spiked and then rapidly mean-reverted.
Looking at the impermanent gain/loss, we can see that from the moment of inception, as the option was out of the money (OTM), LPs earned an impermanent gain but it started to decrease as the underlying approached the strike price.
The amount of MATIC options bought was 5,975 and the amount that was sold was 3,931. A total volume of 9,906 options exchanged hands over the course of 10 days. This was vastly larger than our projection of 300 options from the LP simulation (link to simulation here).
We predicted an average volume of 300 options but got close to 10,000.
We expected an average fee of $12.56 but got 10x that amount ($124.17).
Given the immense demand we’ve seen for MATIC options, we’re launching another options pool to trade MATIC options available here.
LINK
The LINK put option with a strike price of $27 also expired ITM, on June 11th. The first liquidity provider (LP) deposited 111.11 LINK put options (Token A) and 2000 USDC stablecoins (Token B). The initial implied volatility was set to 220% at which point the interaction of traders through buying and selling on the AMM took over the dynamics of implied volatility from there. According to the algorithm, the put option was initially priced at $2.35.
We see that around event 350 (Friday, June 4th, 2021), just like with MATIC, the price of the underlying breached the strike price of $27.00 as seen below.
The implied volatility started to fluctuate early in the life of the option and declined as the time approached maturity with most people holding it to expiration and exercising.
The fees earned with LINK options by LPs was less than that of MATIC. The decline in fees at the end is due to LPs withdrawing their liquidity and the fees that they earned during the life of the option.
With respect to impermanent gain/loss for LINK the LPs reached an impermanent gain of as high as 5% ($1.05) as LINK was OTM and broke even as it expired ITM the last day without taking into account fees.
The amount of LINK options bought from the AMM was 356 and the amount that was sold was 491. A total volume of 847 options exchanged hands over the course of 10 days.
In Conclusion
When LPs added at the beginning of the pool still had a slight impermanent gain in both cases for MATIC and LINK expiring ITM. For any LPs who added liquidity at the peak, the fees helped reduce the impact of any losses generated.
Overall, we discovered that MATIC seems much more popular for trading on Pods so far. In light of these findings, another MATIC option was available in the second demo release here.
Message us in our discord here about an asset you’d like to see for put options! Is it CRV, UNI, LINK, or something else? Recently, we added SUSHI as a side experiment to see what people prefer to hedge.
That’s it for now! Let us know if you have any questions.
About Pods
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start testing the app on app.pods.finance
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