SushiSwap x UMA: Announcing Call Options for xSUSHI

Building Call Options on UMA (Part 3)

TL;DR : SushiSwap and UMA have joined forces to build a xSUSHI call option token with a $25 strike price and expiry of May 31, 2021. Over $1mm of these tokens have been minted and pooled with $xSUSHI on SushiSwap. They join existing UMA call option tokens that are already live. These call option tokens can be minted using MySynths.finance, a community created dApp that won UMA’s recent bounty. If you are bullish $xSUSHI you can buy XSUc25–0521 for leveraged, limited downside exposure on a rally. If you are a holder of $xSUSHI and want to collect premium while you wait to take profits then you can mint XSUc25–0521 and sell it. This demonstrates how useful call option tokens can be for the DeFi community and how easy they can be created using UMA’s infrastructure.

We continue our call option series of articles by jointly announcing the launch of xSUSHI call option tokens with SushiSwap. In our first article we discuss how a decentralized call option is created on UMA’s infrastructure while in our second article we show how a call option token was brought onto mainnet. These same ideas and concepts are used to create xSUSHI call option tokens and can be used to create call options on any ERC20 token.

As a refresher, a call option gives the buyer the right, but not the obligation to buy an asset at a specified price (strike) and a specific time period (expiry). These call option tokens are named XSUc25–0521 as they expire on May 31st, 2021 and have a strike price of 25 USD. They are quoted versus $xSUSHI and can be pooled on any AMM (Automated Market Maker).

Similar to how the UMA call option tokens were constructed, these new token options use UMA’s Expiring Multi Party (EMP) contract and take advantage of the financial product library feature. As long as the collateral and price identifier is approved, no new UMIP or governance vote is needed to create these call option tokens. Developers can easily create a call option with any strike and with any approved collateral by simply designing their own library contract and with no need for a governance vote. As a reference for xSUSHI, the collateral was approved in UMIP67 and price identifier was approved in UMIP68.

The design of these call option tokens imply a few things:

• Token sponsors do not need to manage their collateral ratios as it remains static for the life of the contract at 1 underlying token per 1 call option token.
• There will be no liquidation bots necessary and the ability to withdraw collateral or liquidate a position is effectively disabled.
• These call option tokens are “European Options” which mean they can only be exercised at expiry. There will only be one price request needed at expiry to settle the token. Also, with the new design of our optimistic oracle, settlements can happen just 2 hours after expiry (assuming no disputes in the proposed settlement price).
• The payout function in the Settlement Price implies “cash settlement” which means the token sponsor of the option will settle any profit due to the token holder, rather than take payment from the token holder for transfer of tokens.

What Can You Do With Call Option Tokens?

Leveraged Bullish Bet

Alex is bullish $xSUSHI and think the recent sell-off is unwarranted so she decides to buy some XSUc25–0521 call option tokens

• $xSUSHI currently trades at 18 USD and the price of XSUc25–0521 is 0.08 $xSUSHI or $1.44 (18*0.08)
• Alex buys 1000 XSUc25–0521 for 80 $xSUSHI or $1,440 (18*80). She now has leveraged upside exposure to $xSUSHI.

On May 31st, 2021

• If xSUSHI/USD settles at 40 USD, Alex receives 375 $xSUSHI [1000*(40–25)/40]. This is a profit of 295 xSUSHI (375–80) or $11,800 (40*295).
• If xSUSHI/USD settles at 24 USD, Alex receives nothing. This is a loss of 80 $xSUSHI or $1,440 which is the original premium she paid and the most she can lose.

Target Profit Taking and Income While You Wait

Brad owns $xSUSHI and is looking to take profits if it trades at 25 USD. He decides to mint 1000 XSUc25–0521 and sell them.

• $xSUSHI currently trades at 18 USD and the price of XSUc25–0521 is 0.08 $xSUSHI or $1.44 (18*0.08)
• Brad deposits 1000 $xSUSHI as collateral and mints 1000 XSUc25–0521
• He sells them for 80 $xSUSHI or $1,440 (18*80) . He earns this premium upfront and leaves his position and just waits till expiry.

On May 31st, 2021

• If xSUSHI/USD settles at 40 USD, Brad owes the call option token holder 375 $xSUSHI [1000*(40–25)/40]. After he settles his position he would receive 625 $xSUSHI (1000–375).
• This is the equivalent to him selling his 1000 $xSUSHI at 25 USD (25*1000 = 40*625).
• However, he actually earned a premium of 80 $xSUSHI for selling his call option token so net he was actually returned 705 $xSUSHI (625+80) which would be the equivalent of him selling his $xSUSHI at 28.20 USD [(705*40)/1000].
• If xSUSHI/USD settles at 24 USD, Brad owes nothing to the call option token holder and is returned his 1000 $XSUSHI in whole.
• He also keeps his 80 $xSUSHI (now worth $1,920 (24*80)) as extra income.

As long as Brad is comfortable with taking profits at 25 USD (or in this case 28.20 USD) and not worried about a significant drop in $xSUSHI then this strategy appears optimal. He either sells at 28.20 USD which is 57% (28.20/18) above the market now or earns 8% in two months (~48% APY). The added benefit of call option tokens with $xSUSHI is the fees that Brad will earn from SushiSwap while his $xSUSHI is used as collateral.

Conclusion

UMA’s infrastructure allows anybody to easily and quickly build a decentralized call option with any underlying asset. We are happy to see our friends at SushiSwap take advantage of UMA’s capabilities and utilize their assets to create a call options market benefiting their community. With the new EMP contract, as long as the collateral and price identifier is approved by the UMA community, there is no governance vote needed to design and launch options with any desired strike and expiry. DeFi treasuries can easily use the large number of their own idle governance tokens to create this liquid call option tokens market for the benefit of their community. We are anxious to see how these call option tokens are received by the DeFi community and welcome any feedback.

Resources:

Swap XSUc25–0521 on Sushiswap
XSUc25–0521 Token Address
XSUc25–0521 Contract Address
XSUc25–0521 SushiSwap Pool
Financial Product Library Deployed Contract
Financial Product Library Code
MySynths.finance

Interested in building your own options? Join our Discord: discord.umaproject.org

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