Inherent deficiencies with liquidity provisioning (LP) on Automated Market Makers (AMMs), such as impermanent loss, are well-known to DeFi traders, despite not being recognized for the short optionality positions that they are. While many mechanisms have attempted to address such issues, Panoptic adopts a radically different and much more intuitive approach: enabling traders to go long on optionality in an environment where this trade would otherwise be impossible.

In the first article of this report series, we illustrated that Panoptions are structured as exotic options and present opportunities to capitalize on inefficiencies within AMM market microstructure. The contents of this report will be focused on empirically validating those opportunities – how the streaming premia (streamia) paid for Panoptions is often underpriced relative to an illustrative simulation of the profit-&-loss (PnL) of scalping the gamma of a long optionality/convexity position.

Uniswap functions as an incomplete options market by design, allowing a large supply of short optionality via liquidity provisioning without an easy way for traders to take exposure in the opposite direction. The resulting oversupply of short optionality positions leads to underpricing Uniswap LP positions relative to their exposure to realized volatility. In this report, we will pinpoint exactly how and why these incomplete market inefficiencies can be exploited through gamma scalping on Panoptic.

Uniswap lets traders be short convexity

Uniswap (and other AMM) LP positions allow traders to deposit a pair of assets and earn a rolling fee (called streamia) that is based on the volume and frequency of trades that their capital facilitates. However, hedging the delta of an LP position comes at a cost: by being a buyer in a rally and a seller in a sell-off, an LP is naturally short convexity. If the delta risk is hedged by taking long or short positions in spot and adjusting them dynamically as the spot price changes, that convexity still poses a systematic cost to the hedged LP position, sometimes called “reverse gamma scalping.”

This means that a “delta-hedged” Uniswap LP position gives exposure to two cash flows, both of which are dependent on realized volatility (RV). In one, the LP pays a systematic cost in order to maintain their hedge against exposure to movements in the underlying exchange rate between the tokens in the pool, paying the so-called “reverse gamma scalping” rate. In the other, depositing liquidity in the pool allows the LP to collect the fees paid by traders utilizing the liquidity that they have deposited in the pool.

However, there is no reason to believe that the design of the AMM’s fee structure should match the reverse gamma scalping rate. The amount that an LP stands to collect from an AMM pool over any period is dependent on:

• the volume traded in the pool (Uniswap lists pools for most token pairs in 1bp, 5bps, and 30bps fee tiers)

• the liquidity deposited by other users (who are allocated shares of the total fees collected by the pool proportional to the size and effectiveness of their LP position)

• The nature of flow seen by the pool (retail price-takers tend to adjust the AMM price with more volatility and volume than price arbitrageurs).

The only common driver between the Uniswap trading fees and the cost to maintain a dynamic delta hedge is volume, and even that link is only indirect via its relationship to volatility. In fact, as we will show, there are many cases where the rate paid to an LP is drastically lower than the cost to maintain a delta-hedged position. For example, fees paid to LPs of the ETH-USDC 30bps Uniswap pool were up to 18% less than the cost of gamma-scalping their delta exposure from January 2024 to December 2025.

The design of Uniswap (and other AMM) LP positions means that users can only take one side of this trade – short convexity – by owning an LP position. As a result, LPs are only able to pay the expensive rate (reverse gamma scalping) and receive the (often lower) trading fees.

The lack of venues to trade the long convexity side leads to a systemic inefficiency that prevents LPs from being paid fairly. Two-sided markets enabling participation in long convexity positions are essential to correcting this inefficiency. A sample of this asymmetric dynamic at play is displayed in the below chart of illustrative PnL using theoretical mid prices, where a 46% loss is suffered when deploying a reverse gamma scalping strategy in the ETH-USDC 30bps pool from January 2024 to December 2025.

Do Uniswap LP fees compensate for short-convexity?

To test the difference between the delta-hedging PnL and Uniswap fee, we simulated the performance of hedging a long perpetual call position across multiple Uniswap v3 pools, considering a range of fee tiers and token pairs.

Notes on the Simulation

As shown in the previous report, long-optionality Panoption positions are created by borrowing and selling short an LP position, “inverting” the exposure to gamma of the LP position. Similarly, long perpetual call Panoption positions can be created by trading a long put and going long spot (an application of put-call parity), meaning that the gamma profile (and so delta-hedging) of a put Panoption is the same as a call Panoption. Thus, results for calls also generalize to puts, with results for short positions obtained by taking the negative of the corresponding long positions.

While Panoptions are perpetual, meaning that they do not expire, the curvature (or gamma) of the value profile can be controlled by changing the price range at which the trader is willing to provide liquidity for the underlying Uniswap LP position. Tighter price ranges correspond to shorter effective “tenors” with higher curvature, while longer tenors can be mimicked by wider price liquidity ranges. In a similar way, the delta of the Panoption at entry can be chosen by centering the price range around different strikes relative to the prevailing spot price. To see a fuller explanation of this effect, please refer to the previous article in this series or Guillaume Lambert’s Medium articles.

We simulated hedging the delta of the position at entry, and thereafter allowed it to vary within a small range around 0 as spot prices moved over time. When the delta of the Panoption crossed that threshold, the position was re-hedged by buying or selling the appropriate number of units of the underlying asset. We tested a range of delta thresholds and reported the best performing selections below.

The Uniswap V3 positions that underlie Panoption positions require specifying a price liquidity range (which Panoptic uses to create synthetic “strikes” and “tenors” of panoptions, as shown above). As a result, the gamma of the Panoption is zero above and below the price range, which no longer requires the hedge position to be adjusted further since its delta remains unchanged at zero, and consequently the gamma-hedging PnL also remains unchanged. Correspondingly, there is no fee paid to hold the long Panoption as the liquidity deployed on Uniswap is not used to facilitate trading.

As a result, we simulate “rebalancing” the Panoption by closing out the position once the spot price leaves the target price range, re-entering a new position centred on the new spot price, and hedging the delta of the newly opened position. Assuming that the position is well delta-hedged at the time of rebalancing and ignoring gas costs, this process should incur no change in PnL.

A long call position has positive gamma, which means that by dynamically delta-hedging the Panoption, the trader receives a profit. That cost is weighed against the streamia paid continuously to hold the call Panoption. The chart below shows the theoretical performance of this process for a long 50-delta weekly Panoption in the ETH-USDC 5bps tier pool between 2024 and 2025. The delta was allowed to range between -5 and 5 before it was re-hedged.

In the chart above, the theoretical cumulative net PnL collected by the trader due this 5bps pool gamma scalping tactic largely exhibits a stable, “stairstep” pattern. Conversely, the ETH pool price endures massive fluctuations throughout the same sample period. This underlying turbulence is reflected in a buy-and-hold strategy within the ETH 5bps pool yielding only 31% returns while gamma scalping produces a lofty 219% return. In this simulation, gamma scalping provided a dual advantage through stability amid volatile market conditions as well as a demonstrable amplification in simulated profits.

The cumulative net simulated PnL of gamma scalping is arrived upon by deducting paid fees from the total raw payoff of the strategy. The two series are also highly correlated, as both are dependent on the RV of the spot price in the pool – whenever spot price moves, the delta of the position changes and requires an adjustment to the delta hedge. Similarly, price movements on other trading venues create arbitrage opportunities that drive trading activity in the Uniswap pool. These trades incur fees, which in the case of Panoptions are paid by the call option holder in the form of streamia.

Note that the two cashflows from hedging and streamia are different in two important ways. Firstly, the amount earned from gamma scalping is larger in almost all cases, resulting in a net profit across the full period. Secondly, the two series need not move at the same time. Owing to the fact that the number of units of spot in the delta hedge position is only updated when the absolute value of the delta moves above a given threshold, the capture of realized volatility is not perfect – spot may move around within the delta threshold bands without ever once breaching the bands and locking in hedging profits. However, the streamia fees paid to hold the long position are collected per-trade, meaning that every movement of spot adds to the streamia cost.

The Impact of Fee Tiers on Volatility

Uniswap hosts trading pools for many assets across three different fee tiers (usually 1bp, 5bps, and 30bps of trade notional). As a result, the fees collected by LPs (and thus paid as streamia by long Panoption positions) are of a different magnitude. However, the fee tier also impacts pool fees through its effect on trade size and frequency.

Here, we replicate the analysis of the ETH-USDC pool as before (which one may naively expect to have the same volatility profile) to illustrate this effect. In this analysis the thresholds are broadened to an absolute of 15 delta to maximize the revenue of a call option in the ETH-USDC 30bps pool (as opposed to the 5-delta bands that were most profitable in the 5bps pool simulation).

The simulated performance is similarly positive (the simulated gamma scalping returns outweigh the relatively paltry recorded streamia fee collected by Uniswap LPs), but at a lower magnitude. The gamma scalping returns amounted to around 46%, while the buy-and-hold returns of ETH within the 30bps pool were 28%.

The reason for this disparity is simple: the price quoted by the 5bps pool is more volatile than that of the 30bps pool, requiring a more frequent delta hedge. As an example, the ETH-USDC 30bps call has a maximum of only 37 intraday hedges (albeit at larger sizes at the wider 15 delta bands), while the ETH-USDC 5bps call recorded up to 493 per day.

Below is a summary of the hypothetical annualized returns to gamma scalping using various delta thresholds in both the ETH/USDC 5bps and 30bps pools.

Under-supply of LP positions means that long convexity is more expensive

The result is not unique to only high volume pools. The simulation run on WBTC-USDC 30bps pool also shows the same result for gamma scalping a 10-delta monthly call Panoption, but for a markedly different reason.

The chart above shows a net positive performance due to several “jumps” in hedging returns, despite the cost of streamia outweighing hedging profits over much of the sample period. Further examination of the data reveals that these large jumps in PnL are caused by large, volatile moves resulting in up to 66 hedges performed in a single day.

In contrast to the prior examples, the buy-and-hold return for BTC substantially outperformed the gamma-scalping return of 12% in the 30 bps pool. Simply holding WBTC over the same sample period yields a 105% return. This outcome illustrates the relationship between the supply of short-convexity through Uniswap LP positions and the effective “pricing” of volatility exposure.

ETH–USDC pools are among the most liquid AMM pools, with a large number of LP positions supplying liquidity. WBTC pools had relatively lower LP participation, resulting in a lower supply of short-convexity and higher streamia cost to the Panoption holder.

Gamma-scalping altcoins

Uniswap’s AMM design supports trading pools for a wide range of token pairs. As a result, Panoptic’s infrastructure enables options trading on base–quote pairs that are not typically supported for trading on many other DEXs or CEXs, including memecoins.

This means traders can take onchain, long-optionality positions on tokens such as Shiba Inu (SHIB), PEPE, and Uniswap (UNI). We repeat the gamma scalping simulations on the SHIB-ETH 30bps pool, which pairs the Shiba Inu memecoin against ETH. Here, we keep the delta threshold to trigger re-hedging at an absolute value of 5 delta.

A similar “stairstep” pattern on the gamma scalping PnL appears. Notably, the maximum number of intraday hedges over this sample period was 500 – a natural result of the high volatility of the SHIB-ETH price.

The two charts above compare the net returns from gamma scalping alongside the performance of the underlying spot price for the PEPE–ETH and UNI–ETH 30 bps pools. Monthly calls with delta bands of 5 and 20 were used for the PEPE–ETH and UNI–ETH pool, respectively. Gamma scalping in the PEPE–ETH pool produced a net return of 202%, while the UNI–ETH pool yielded a net return of 48% over the sample period. The longer-dated Panoption structure also resulted in fewer intraday hedges, with the maximum number of hedges in a single day being 126 for PEPE–ETH and 14 for UNI–ETH.

As highlighted by the above table, the versatile attractiveness of gamma scalping among these three pools is further exemplified over buying-and-holding these tokens. The advantage of gamma scalping over buying-and-holding is demonstrated to persist over a variety of token pairs and fee tiers.

LP fees can be charged without a chance to lock in gamma scalping PnL

LP fees can be charged even without a corresponding opportunity to lock in gamma scalping profits. This phenomenon was observed in a scenario where a massive spike in streamia occurred despite the spot price, when viewed on an hourly chart, never moving into the LP position range. Consequently, there was no change in delta, and thus no gamma scalp was locked in for the LP on the hourly basis.

Further examination revealed an “intra-block” flash crash, where the spot price briefly traded back within the LP range and then returned above it before the end of the block. These trades within the range triggered the payment of fees on the long call Panoption, yet the rapid reversal meant no gamma-hedging was performed within the hour.

This highlights that Uniswap’s market structure is inherently different from conventional markets, meaning that there are unique features to AMMs like intra-block trades that impact the results of gamma-scalping.

Conclusion

This report quantitatively demonstrates that the over-supply of Uniswap LP positions’ short optionality can be monetized through the purchase and dynamic hedging of Panoptic’s options infrastructure.

Across multiple pools and fee tiers, our empirical results support this mechanism, showing that gamma scalping can be economically viable rather than merely synthetically replicable. We find that the magnitude and persistence of this effect depend on fee tier, liquidity depth, realized volatility, and the temporal resolution of hedging and fee accrual.

Finally, we show that optimizing delta-hedging parameters enables gamma scalping profitability across a broad range of Uniswap pools, including higher-volatility and niche assets not typically supported for options trading by centralized venues such as Shiba Inu and PEPE. Panoptic’s upcoming V2 platform will make gamma scalping accessible in the convenient form of a perpetual option vault (POV). Future work in this report series will examine volatility surface calibration and the structural distinctions between Panoptions and vanilla options.

Join the growing community of Panoptimists and be the first to hear our latest updates by following us on our social media platforms. To learn more about Panoptic and all things DeFi options, check out our docs and head to our website.

We're excited to announce some important changes to #ResearchBites. To serve you better, we're moving all our content from Substack to our official website.

As part of our continued efforts to enhance your experience and streamline our content, you will now find all our research pieces on https://panoptic.xyz/research/.

Why is this great news for you?

1. Everything in One Place:

Instead of hopping between Substack and our website, you'll have all our content consolidated in a single location. This makes it easier for you to navigate and access all our resources. From our in-depth research pieces to informative blogs, the whitepaper, comprehensive docs, and our interactive web app, it's all just a click away.

2. Explore with Enhanced Search

We're also thrilled to announce that we've implemented a powerful new search feature on our site. This search engine not only combs through our research articles but also our blogs, docs, and all other resources. Whether you're looking for a specific #ResearchBites piece or a specific topic within our website, just enter your keywords into the search bar and results from all corners of our website will appear. This is another step towards making our content more accessible and easier to navigate.

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No need to worry about missing our latest research. You can now subscribe to our RSS feed at https://panoptic.xyz/research/rss.xml. If you're new to RSS feeds, they are a great way to get notified when we publish new content. All you need is an RSS reader. Here's how to do it:

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These changes reflect our commitment to providing you with a seamless and enriching reader experience. Our new website gives us the ability to incorporate more engaging and dynamic content formats and create a more personalized user experience.

Thank you for your continuous support and engagement with #ResearchBites. We're excited about this next chapter and look forward to seeing you on our new platform!

Straddles🤸🏽‍♂️ & strangles 🙅‍♀️😵 are options strategies that let you bet on volatility. What's the difference? How to choose the right width? 💊 Keep reading to take the red pill and see delta, vol, & strangles in an entirely new way...

The names "straddle" & "strangle" conjure up images of fitness🤸🏽‍♂️ and murder🙅‍♀️😵. However, in the world of options, straddles & strangles can be both liberating and legal. We’ll explain:

• What they are

• When to use one over the other

• How to choose the right strikes

🤸🏽‍♂️ Straddles are at-the-money (ATM) bets on volatility. Buying a straddle means you are betting on the price moving more than expected by the market, either UP or DOWN. Need a refresher? Check out our latest #ResearchBites thread on straddles!

🙅‍♀️😵 Strangles are also volatility bets and benefit from price volatility (for buyers) or price stability (for sellers) just as straddles do. However, unlike straddles, strangles can be customized to your taste 😋

• Straddle: same strikes

• Strangle: different strikes

Another difference is the premia:

• Straddle: expensive💰

• Strangle: cheap🫰

That's b/c the straddle's legs are ATM, meaning they're *less* likely to expire worthless. The strangle's legs are out-of-the-money (OTM), meaning they're *more* likely to expire worthless.

Because strangles are wider they're easier to manage.

(Seller's POV)

• Straddle: higher vega, lower probability of profit (POP), risk of becoming inverted 😳👇, need to monitor/manage frequently

• Strangle: lower vega, higher POP, more forgiving, less frequent management

(Buyer's POV) The underlying price only has to move a little for the straddle to become in-the-money (ITM). Whereas the price has to move A LOT before the strangle becomes ITM. You can actually quantify the likelihood of each strategy becoming ITM with delta! 👇

Delta measures how much $ the option value changes in response to a $1 change in the underlying asset price.

Delta = 0.5 example: A $1 increase in $ETH results in a $0.50 increase in an ETH option's value. But delta can also be interpreted as probability! 💊

Delta ALSO proxies the expected probability that an option will end ITM at expiration.

• Delta = 0.5: Option has ~50% chance of ending ITM.

• Delta = 0.7: Option has ~70% chance of ending ITM.

• Delta = 0.2: Option has ~20% chance of ending ITM. 💊🤯

Let's review straddles vs. strangles now that we know the secret behind delta:

• Straddle: legs are ATM ➡️ delta = 0.5

• Strangle: legs are OTM, less likely to be exercised, delta is smaller ➡️ delta < 0.5

(Combined legs are still delta neutral ➡️ put + call delta = 0)

Straddles have a 100% chance of ending ITM.

• Put leg: delta = -0.5 ➡️ 50% chance

• Call leg: delta = 0.5 ➡️ 50% chance 50% + 50% = 100% chance that a leg ends ITM

Strangles have a <100% chance of ending ITM. Ex:

• Put leg: delta = -0.2 ➡️ 20% chance

• Call leg: delta = 0.2 ➡️ 20% chance 20% + 20% = 40% chance that a leg ends ITM

(Seller's POV) We also have to factor in the upfront premia earned from selling straddles/strangles. There might be a 60% chance of the strangle expiring worthless (40% chance of becoming ITM). But the probability of profit (POP) is >60% due to premia earned by the seller.

In fact, strangles have higher POP than straddles. But there's a tradeoff:

• Straddle: Lower POP, higher profit potential

• Strangle: Higher POP, lower profit potential ➡️ Less risk, less expected return!

Straddles:

• Same (ATM) strikes

• Expensive

• More monitoring

• Low probability of profit (POP)

• High profit potential

Strangles:

• Different (OTM) strikes

• Cheap

• Less monitoring

• High probability of profit (POP)

• Low profit potential

📢 None of this is financial advice.

Warning: for sellers, both straddles and strangles have potentially unlimited loss (and are equally susceptible to black swan events)

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In the world of decentralized finance (DeFi), large investors, known as "whales," can have a significant impact on liquidity and token prices. In this blog post, we'll take a closer look at whale behavior in Uniswap V3, examining the top 5 positions in popular pools, and explore how this information can be valuable for other investors. We'll also discuss how Panoptic can provide better alternatives for whales and other investors.

Why Tracking Whale Behavior Matters

There are three main reasons to track whale behavior:

1. Whales can significantly impact liquidity and token prices. By understanding their moves, you can anticipate market trends and make informed decisions.

2. Whale behavior offers insight into market sentiment. By observing whether they are bullish or bearish on specific tokens, you can use this information to shape your own investment strategies.

3. Lastly, tracking whale behavior helps you gauge the overall health and stability of the DeFi market, keeping you informed and prepared for potential shifts.

You can use these insights, together with Panoptic too. anticipate, hedge against, and profit from large whale moves;

• If you observe bullish sentiment, consider buying call options

• If you notice bearish sentiment, get put options

• If you anticipate significant market fluctuations, consider using a straddle strategy

Analysing Whale LPs in Uniswap V3 Pools

To better understand whale behavior, we analyzed the top 5 positions (by size) in several popular Uniswap V3 pools, focusing on liquidity provider (LP) range, activity, and annual percentage rate (APR). Please note that these results are accurate at the time of writing and may vary in the future.

Here's a summary of our findings for each pool:

• ETH-USDC-5bps

  • 4 out of 5 positions are in range

  • All positions are less than 4 months old, with 3 being less than 10 days old

  • APR ranges from 2% to 51%

  • Mixed sentiment towards ETH, with 2 positions being bullish, one bearish, and the rest neutral

  • The third largest whale actively manages liquidity

• ETH-MATIC-30bps

  • 4 out of 5 positions are in range, with the top position not in range

  • Positions have wide ranges

  • The oldest position is under 4 months old

  • APR ranges from 3% to 18%

• ETH-BTC-30bps

  • The top 2 LPs are contracts (Gnosis Safe Proxy)

  • Positions are relatively new, with the oldest being 90 days old

  • Long ranges, with the top 2 positions having wide ranges and others being bullish on BTC

  • APR is 1% for the top 2 positions and 5-8% for others

• WBTC-USDC-30bps

  • Most positions are bullish on BTC

  • Position age ranges from 4 to 480 days, with the top 2 positions being 4 and 60 days old

  • APR ranges from 2% to 18%

• ETH-UNI-30bps

  • 4 out of 5 positions are in range

  • Positions have wide ranges

  • The youngest position is 2 months old (out of range), with others being older than 4 months

  • The second-largest LP is also present in other pools

  • APR ranges from 1% to 3%

Key Takeaways from Whale Behavior

Based on our analysis, we can draw a few conclusions:

• There is no "one size fits all" approach for whales in Uniswap V3

• Some positions remain idle and do not collect fees

• Several whales could benefit from a more active approach to managing their liquidity

Comparing Uniswap V3 and Panoptic

Would these whales be better off in Panoptic? The answer is yes. Panoptic offers the following advantages:

• Larger fees for passive liquidity provision (PLP)

• Market-neutral strategies when buying or selling

However, it is essential to note that trading options in Panoptic would require more active participation from whales compared to simply sitting in the pool.

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Panoptic Straddles

Did you know you can trade straddles 🤸 on Panoptic...

• Long vol? Buy a straddle!

• Short vol? Sell a straddle!

Profit even if you don't know which direction price is going 😈

Here's 6 backtests on trading straddles the last TWO years!

Straddle Basics

(Need a refresher? Check out our latest #ResearchBites thread on straddles!)

Buying a (long) straddle is a "long vol" bet. If price moves significantly in either direction (up or down), you profit.

In Panoptic, you pay nothing upfront to buy the straddle. Instead, you pay "as you go" while the perpetual options are in range (+1 for capital efficiency!).

A straddle is composed of a put & call (same strike). In Panoptic:

• A put is created by borrowing a Uni V3 LP token

• A call is created by buying a put and the underlying asset

Hypothesis

We predict that buying at-the-money ETH straddles via Uniswap v3 would've performed well for 2 reasons:

1. ETH's implied volatility seems understated

2. Uniswap market frictions — can't borrow LP tokens (to create long option payoffs)

Let's see!

Backtest #1

Buying an ETH straddle via Uniswap every day (all values in USDC):

• Payoff: +515%

• Premia (cost): -397%

• Return: +118%

👉 Payoff > Premia → Profit🔝🤑📈

That's pretty good! Which leg had more impact?

For times when the long straddle was profitable, we label whether the call or put leg was exercised.

Dailies:

• Call: 54%

• Put: 46%

• Total: 224

Weeklies:

• Call: 53%

• Put: 47%

• Total: 34

Monthlies:

• Call: 50%

• Put: 50%

• Total: 10

Calls slightly dominated!

Backtest #2

Returns on buying every day vs. week vs. month:

• 🌕 Dailies: 118%

• 🧑‍🚀 Weeklies: 11%

• 🚀 Monthlies: 21%

👉Active management for the win!👈

(Keep in mind this doesn't account for gas fees⛽ — future #ResearchBites 😉)

Good returns, but can straddles survive a bear market?👇

Backtest #3

Bull vs. bear markets:

• 🐂 Bull Market: June '21 - April '22

  • 👉 Compare w/ ETH HODL return: 0.8%

• 🐻 Bear Market: May '22 - Feb '22

  • 👉 Compare w/ ETH HODL return: -41%

Straddles are delta neutral. Profitability is based off of volatility, irrespective of 🐂 or 🐻!

Backtest #4

Buying an ETH straddle via Uniswap on different pools:

• 🌕 5bps: 118%

• 🚀 30bps: 90%

• 🧑‍🚀 100bps: 62%

👉The 5 bps pool outperformed, it had the lowest premia!

Backtest #5

What about selling straddles? It's just the opposite:

• 🙌 Buying: 118%

• 💔 Selling: -118%

Backtest #6

When would selling straddles be profitable? When IV > RV.

Market's belief of $SHIB volatility is likely overstated, leading to huge returns for straddle sellers:

(all values are in ETH)

• Payoff: -632%

• Premia (earned): +1170%

• Return: +539%

Conclusion

Don't forget, selling straddles is capital efficient (Panoptic natively supports this through its novel multi-leg ERC1155 minting system)!

Want to buy a straddle on Panoptic? 🔍 Here's a sneak peek of our new UI 👀

Key insights:

• 🤸 Long straddles:

  • Delta neutral, profit when price moves ⬆️ or ⬇️

  • ETH dailies outperformed

  • Profitable when IV < RV

• ^ Short straddles:

  • Delta neutral, profit when price stays constant ↔️

  • SHIB-ETH dailies outperformed

  • Profitable when IV > RV

Caveats:

• ⛽ Ignores gas/spread/swap fees/commission

• 💲 Assumes option premia = LP collected fees

• ❓ Hypothetical — you can't buy options on Uniswap (Panoptic soon 🤫)

Disclaimer:

• 📢 None of this is financial advice.

• ⚠️ Past performance is no guarantee of future results

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Straddles 🤸🏽‍♂️

Options are crazy...did you know that you can make money when price goes up OR down? 🤑 Sounds too good to be true? It's not.

Here's a strategy EVERY trader should know to go "long vol" or "short vol". It's called a straddle.

What is a Straddle?

Straddles let you profit when price moves in EITHER direction.

• 😈 As long as price moves, you profit (delta neutral).

• 👿 But if the price stays the same, you lose money.

Straddles consist of 2 legs: 1 call + 1 put. The call option lets you profit on the upside and the put option lets you profit on the downside. This results in you profiting if price moves, regardless of direction. However, there's a cost.

The cost of buying a straddle in TradFi is the upfront premia you pay for both legs (call + put). In Panoptic, the upfront cost is 0, and you instead pay a gradual premia that accumulates every block while you're "in range" (think Uni V3 LP).

More info here.

Straddles are Volatility Bets

This strat sounds OP...why not always buy straddles? In efficient markets, the cost of a straddle accounts for the likelihood of the straddle being profitable. The higher the chance that asset price will move (volatility), the higher the price of the straddle ⚖️

The price of a straddle is directly related to volatility (σ):

Hence, trading straddles is a great way to trade volatility!

Crypto example

• ETH price: $2000

• Original straddle cost: $150 ($75/leg)

Suddenly, the government states "An Important Regulation on Crypto" will be announced next week. You check the price.

→ New straddle cost: $300 🚀

The price of an ETH straddle doubled because the market believes that ETH will now be twice as volatile.

Review

• 🔮 Implied Volatility (IV) = Market's belief

• ⚡️ Realized Volatility (RV) = How volatile ETH ends up being

Short Straddles

Did you know you can also sell straddles?

Short straddle = sell 1 put + sell 1 call

This is risky since you lose money if price moves in either direction. However, you profit if the price stays the same! You are essentially betting that volatility is overstated (IV > RV) and the announcement is a nothing 🍔.

Short vol vs long vol:

• Short Vol: You think volatility will be lower than the market believes (IV > RV). Sell a straddle.

• Long Vol: You think volatility will be higher than the market believes (IV < RV). Buy a straddle.

Summary

• 🤸🏽‍♂️ Straddles: delta neutral options strategy, profit off of volatility

• 🛒 Buy Straddle (long vol): long call + long put

• 🏷️ Sell Straddle (short vol): short call + short put

You can trade capital-efficient straddles on Panoptic. More #ResearchBites backtesting Uniswap data is coming soon!

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Introduction

Panoptic is a groundbreaking innovation set to change the landscape of options trading. By introducing the Streaming Premia Pricing Model (StrP), Panoptic aims to make options trading more accessible, capital efficient, and secure. In this blog post, we will explore the incredible benefits of Panoptic's next-gen approach to options trading.

What is StrP?

StrP is a novel pricing model that eliminates the need for upfront premium payments. Instead, users pay small fees over time, as long as the option remains in range. The model functions like a series of tiny options expiring continuously, with the premium accumulating over time. These fees depend on factors such as position range, liquidity, and volume, and are designed to return the Black-Scholes-Merton (BSM) price of the option on average.

Why StrP?

Traditional pricing of perpetual options can be complex and reliant on oracles, making it challenging and costly to implement on-chain. StrP, on the other hand, is DeFi native and can be easily executed on-chain. Here are five key advantages of StrP:

1. Lower Barrier to Entry: By eliminating upfront premium payments, Panoptic makes options trading more accessible. The "pay-as-you-go" system encourages greater participation and fosters a more vibrant ecosystem.

2. Dynamic Risk Management: As StrP accrues gradually, the need to top up collateral for long positions becomes more predictable. This means no wasted capital on options that are not in range, ensuring a more efficient use of resources.

3. Capital Efficiency: Panoptions are more capital efficient than traditional options, as users do not pay a premium upfront. Users can create short-lived, synthetic positions for a fraction of the price and deploy multi-legged positions in one go.

4. Robustness & Gas Efficiency: StrP does not require an oracle, as the streaming premium is computed on-chain. This makes the pricing model robust against oracle manipulation, cryptographically secure, and gas efficient, since there are no oracle sync costs.

5. Fair Pricing: The on-chain computation of the option's pricing ensures transparency and verifiability. Sellers receive larger premiums for positions that remain open, while buyers pay proportionally to their time to exercise, creating a win-win situation.

Conclusion

Panoptic's StrP is set to revolutionize options trading by fostering a more accessible, flexible, efficient, robust, and open market. As the world of finance, DeFi, and options trading continues to evolve, Panoptic is leading the charge in driving innovation.

Stay tuned for more updates on how StrP is implemented on-chain, as well as future research bites for builders interested in this cutting-edge technology.

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🌊 Uniswap v3's business license expired on April 1st, sparking a massive wave of interest in Concentrated Liquidity Market Makers (CLMM).

Here's 8 reasons why concentrated liquidity (and Panoptic!) is the FUTURE of DeFi 🛥️🚀!

🍴 Reason #1: New CLMMs everywhere

The OGs:

• Uniswap v3

• Kyber Elastic

• Trader Joe v2

Uni v3 forks:

• PancakeSwap v3

• SushiSwap v3

• Quickswap v3

• Camelot v3

• ApeSwap v3

• MaiaDAOEco

Panoptic can integrate all CLMMs! (Panoptic v2...😉)

See this thread to learn more about Uniswap’s business license and forks

📈 Reason #2: CLMM traction is unstoppable

The majority of DEX trading volume is on CLMMs. Out of the $87 bn traded on DEXs last month, $49 bn was on CLMMs (56%)!

CLMMs' capital efficiency provides better slippage, making it a popular choice for traders and aggregators.

The trend is CLMM's friend:

Nearly a fifth of TVL on DEXes belongs to CLMMs (18%). That's up from ~7% a year prior! 🚀📊

Interesting how < 1/5 of TVL is supporting > 50% of DEX volume...that's capital efficiency! 🤯

🎯 Reason #3: CLMMs are capital efficient

CLMMs allow liquidity providers to concentrate their funds within specific price ranges. This maximizes potential returns, minimizes idle capital, and reduces slippage for traders!

🙆 Reason #4: CLMMs are flexible.

CLMMs let LPs set their preferred price range. They can choose between tight/narrow ranges that are above/below/straddle the current price.

In fact, LPs can still choose to provide full-range liquidity on a CLMM just as they do on regular AMMs!

(See this thread for more on choosing a price range)

🏪 Reason #5: CLMMs are convenient for Liquidity Providers (LPs)

CLMMs let LPs provide single-sided liquidity:

For example, in ETH-USDC, LPs can deposit ETH in any price range above the current price or deposit USDC in any price range below the current price.

🔓 Reason #6: CLMMs enables option payoffs

Concentrated liquidity allows Panoptic to provide true options payoffs (i.e. put and call options).

If you set your LP range to be extremely narrow, the payoff looks exactly like a short put option! 🤯

(See this thread for more)

🫶 Reason #7: CLMMs offer customizable strike prices

Concentrated liquidity allows Panoptic to create in-the-money, out-the-money, and at-the-money puts and calls at any strike price!

The "middle" part of the LP range is the strike price.

(by "middle" we mean geometric average)

🧩 Reason #8: CLMMs use financial NFTs

CLMMs use NFTs to represent unique LP positions.

Panoptic uses ERC1155s to aggregate options positions enabling composability!

ERC1155s allows for multi-legged, capital-efficient, and gas-efficient options (future #ResearchBites 😉)

(See this thread for more info on why Uniswap represents LP tokens as NFTs)

In summary, CLMMs are efficient, flexible, and are here to stay.

Panoptic is leading the DeFi options space by leveraging the power of CLMMs with innovative features like options payoffs, customizable strike prices, multi-legged minting, and capital efficiency! 🚀🌐📈

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Introduction:

Uniswap V3 brought a significant innovation to the world of decentralized finance (DeFi) with its concentrated liquidity feature. This breakthrough allowed liquidity providers (LPs) to allocate their funds within custom price ranges, resulting in greater capital efficiency and higher potential returns. But how concentrated is liquidity in UniV3, and what are the implications for the DeFi ecosystem? In this blog post, we'll dive deep into the world of concentrated liquidity positions and uncover the key factors that make UniV3 stand out from other decentralized exchanges.

1. Understanding Concentrated Liquidity in Uniswap V3

1.1 What is concentrated liquidity?

In Uniswap V3, LPs can allocate their funds within custom price ranges, known as "concentrated liquidity positions." This allows LPs to target specific price levels where they believe trading will occur, leading to more efficient use of their funds.

1.2 How does it differ from Uniswap V2?

In Uniswap V2, LPs had to allocate their funds uniformly across the entire price range. This often resulted in low capital efficiency, as most of the liquidity was concentrated in areas where trading seldom occurred.

2: Analyzing Concentrated Liquidity Positions

2.1 Methodology

We used the UniV3 subgraph to query the liquidity positions of some of the largest pools in UniV3. We grouped positions by address and summed the total amount of funds deployed (in USD).

2.2 Key Findings

• Less than 8% of LPs provide more than 80% of liquidity in all pools.

• Fewer than 20 addresses control most of the pools.

• In some pools, just 1% of LPs own over 80% of the liquidity.

2.3 The Pareto Principle in Concentrated Liquidity

Our findings suggest a stronger version of the Pareto Principle in UniV3's concentrated liquidity. This principle states that 80% of the consequences are due to 20% of the causes. In our case, 80% of liquidity is due to just 1% of LPs.

3: Implications of Concentrated Liquidity

3.1 Implications

• Deep liquidity pools enable efficient swaps, resulting in a better user experience.

• Higher potential returns for LPs due to greater capital efficiency.

• Potential risks and centralization, as a few top LPs could have significant influence over token prices.

• Possible short-lived price manipulation or increased volatility.

4. Conclusion:

The concentrated liquidity feature in Uniswap V3 revolutionized the DeFi space, and Panoptic aims to do the same for options trading. As the DeFi ecosystem evolves, innovative solutions like Panoptic will help users hedge their positions against potential risks arising from concentrated liquidity.

Uniswap V3's concentrated liquidity positions have reshaped the DeFi landscape, bringing greater capital efficiency and higher returns for LPs. While this feature has numerous benefits, it also comes with potential risks and centralization concerns. Understanding these dynamics is crucial for navigating the ever-changing world of decentralized finance. With innovations like Panoptic on the horizon, the future of DeFi looks brighter than ever.

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Maximizing your potential returns with minimal capital? 💰 It's not magic, it's capital efficiency! 🔮

💪📈 We’ll discuss 4 options strategies that can help you make more money with less capital:

https://twitter.com/Panoptic_xyz/status/1643767225642532864

What is capital efficiency?

In options trading, it's the ability to control a maximum amount of funds with minimal capital investment. It measures how effectively you use available capital to achieve your desired trading objectives.

Sounds complicated? Don’t worry, we’ll ELI5 (🐵👑👇)!

Imagine a conveyor belt of small bananas 🍌. As the bananas 🍌 pass through the magic box 📦, they turn into GIANT bananas 💉🍌.

• Small banana 🍌 = initial investment

• GIANT banana 💉🍌 = funds you control

• 💉= Panoptic's collateral tracker

Let's look at the formula👇

That is, capital efficiency is the ratio of "notional value" to collateral.

• Collateral: Funds backing the position

• Notional Value: The value a position controls

(Both of these differ from "option value", which is the premia)

In Panoptic:

• Sellers get up to 5x leverage

• Buyers get up to 10x leverage

In other words:

• Selling a 1 ETH option requires 0.2 ETH in collateral

• Buying a 1 ETH option requires 0.1 ETH in collateral

So which strategy is most efficient? Let's find out!

Strategy #1 - Naked Call

Naked calls 🙈📞 are pretty efficient...Naked Call 🙈📞 = sell 1 call:

https://twitter.com/Panoptic_xyz/status/1641834029581492225

• Collateral: 0.2 ETH

• Notional Value: 1 ETH

• → Capital Efficiency: 5x 😁

That's very capital efficient 😁, but also risky 😳: naked calls have infinite risk 💀

Let's compare with covered calls!

Strategy #2 - Covered Call

Covered Call 🛌🏻📞 = sell 1 call + hold asset:

https://twitter.com/Panoptic_xyz/status/1641834042512543745

• Collateral: 1 ETH

• Notional Value: 1 ETH

• → Capital Efficiency: 1x 😔

Covered calls require you to hold the full amount of the underlying asset, so it won't be as efficient.

Let's try the "Poor Man's Covered Call"!

Strategy #3 - Poor Man’s Covered Call

Poor Man's Covered Call (PMCC) ↗️🧈 is a synthetic covered call. It's like a covered call, but you don't need to hold the underlying asset. PMCC ↗️🧈 = sell 1 call + buy 1 call:

https://twitter.com/Panoptic_xyz/status/1628530324262223872

• Collateral: 0.2 ETH + ~0.1 ETH

• Notional Value: 2 ETH

• → Capital Efficiency: ~6.66x 😍

(Note: the collateral for buying the call is slightly larger than 0.1 ETH. This is because there is an “in-the-money amount” that is equal to the max loss the long position can suffer in terms of intrinsic value. Hence, the capital efficiency will be slightly less than 6.66x.)

Strategy #4 - Short Straddle

Selling straddles is a bet against volatility. Can straddles beat the previous 6.66x efficiency? Straddle 🤸🏽‍♂️ = sell 1 call + sell 1 put:

• Collateral: 0.2 ETH + 0 ETH

• Notional Value: 2 ETH

• → Capital Efficiency: 10x 🤪

Wow, 10x efficiency is the most! Why's that? Straddles are made up of 2 legs: 1 call & 1 put. Only one leg can be “tested” at any given time, i.e. if the put is ITM then the call is OTM, and vice versa. Hence, collateral req. for selling straddles is relaxed to just the req. of one leg (whichever is larger). 🤯

https://twitter.com/guil_lambert/status/1593370796650545153

Summary

In order of capital efficiency:

1. Straddle

2. Poor Man's Covered Call

3. Naked Call

4. Covered Call

Caveats:

• Collateral requirements above assume normal market conditions ("target pool utilization")

• See more here

For more examples of capital efficient strategies and Options Trading 101 basics, visit here

Question:

• How well do DeFi straddles perform? (Future #ResearchBites 😉)

Disclaimer:

• 📢 None of this should be taken as financial advice.

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Implied volatility and volatility smile are two concepts that underlie how the market prices options and perceives risk. In this post, we'll explore what they are, how they work, and what their role is in Panoptions.

Implied Volatility (IV)

Implied volatility is a measure of the expected future volatility of an underlying asset. It reflects market participants' expectations about how much the asset's price will move. Realized volatility, on the other hand, is a measure of the volatility in the past.

Why Does Implied Volatility Matter?

Higher IV means higher option prices, as the market expects more significant price swings, translating to a higher risk. Traders use IV rank and IV percentile to gauge whether options are expensive with respect to their historical averages.

How Does Implied Volatility Work in Panoptions?

Panoptions uses a "streaming premia" model, in which buyers pay sellers a small fee whenever a Panoption is in range. This fee is related to the amount of fees a UniV3 LP would make (plus a small spread). From this, option premia then depend on the fees collected in a pool, which in turn depend on the fee tier in UniV3 pool, volume, and tick liquidity. By comparing the cumulative premia of an at-the-money option to the actual fees collected by a UniV3 pool per unit of time, we can derive an IV for Panoptions that incorporate those quantities; indeed, in this setting, IV is given by

Volatility Smile

When we plot IV against different strike prices, we often see a "smile" pattern, AKA the volatility smile. This smile indicates that options with out-of-the-money (OTM) and in-the-money (ITM) strikes have higher IV than when at-the-money (ATM).

Reasons for the Smile

The volatility smile can be attributed to factors like outlier risk, market psychology, supply and demand, and trading activity. It's more pronounced for shorter-dated options, which are more sensitive to sudden price movements.

Volatility Smile in Panoptions

The volatility smile in Panoptions depends on the relation between traded volume and liquidity of the pool. Typically, there is more liquidity close to the current price, as shown below (now that’s a crooked smile).

How Do Panoptic IVs Compare to Traditional Finance Option IVs?

Both help assess the market's expectation of future price changes. However, Panoptic's IV formula is tailored to the unique structure of liquidity pools, whereas traditional finance option IVs are derived from option prices. In the figure above, for example, IV is smaller for higher ETH prices than for small ETH prices, suggesting bullish market sentiment. And if IV < RV, then LPs would be disincentivized to provide liquidity in that specific pool.

Conclusion

Whether vanilla options or Panoptions, IV is a crucial metric, helping traders gauge risk and make more informed decisions. Though each case is calculated differently, the concept remains the same: understanding market sentiment and price movement. By understanding implied volatility and volatility smile, traders can better understand how options are priced and use that knowledge to make smarter trading decisions.

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🔥 If you're looking for a way to earn extra income, selling call options can be a powerful strategy. But beware: selling naked calls can be risky. Here's what you need to know:

💰 Selling call options gives you the ability to earn premium income. But if you sell a naked (unhedged) call, you're taking on unlimited risk since you're obligated to sell the underlying asset at a preferential price if the buyer exercises the option.

🤔 So what's the alternative? You can sell covered calls, which involves selling call options on an asset you already own. In TradFi, this is considered "safer" since:

• Downside is NOT unlimited (but still substantial)

• Markets tend to go up (this is a bullish strategy)

The payoff of selling a covered call is the same as a naked put. (Bonus point: covered call = naked put = Uniswap LP 🤯)

🔍 To figure out which strategy is right for you, it's important to backtest and analyze past data. Let's analyze what periodically *selling* naked ATM ETH calls over the last 2 years might look like!

Anyone will be able to sell options on Panoptic for any asset at any strike. Panoptic options even have an "effective Time To Expiration"👇 This means you can customize your Panoption to sell "dailies", "weeklies", and "monthlies". Let's backtest these 3 strategies!

Backtest #1: selling (naked) calls on $ETH every week.

• Earned 126% in premia

• Lost 132% from calls being exercised

→ Total PnL: -6%

(Compare to ETH HODL: -32%)

Unfortunately, our strategy wasn't profitable. What if we tried different rebalancing periods?

Backtest #2: selling (naked) calls on $ETH every day/week/month.

• Weeklies: -6%

• Monthlies: -28%

• Dailies: -57%

Wow...dailies & monthlies did even worse. Let's try something typically seen as "less risky" — covered calls!

Backtest #3: naked calls vs. covered calls.

• Naked calls: -6%

• Covered calls: +6%

(The fact that they are exactly opposite is a coincidence.)

Covered calls did better...but why?

Notice how naked calls (blue curve) performed great in May 2022 — during the Terra collapse and bear market!

Fact:

• Bull market → naked calls 👎

• Bear market → naked calls 🚀

Let's test this out on one of the biggest bear markets: the UNI-ETH price!

In the spot markets, UNI has massively underperformed ETH. That makes the UNI-ETH price a bear market. So what happens if you sell naked calls on UNI-ETH? Answer:

• 😎 Dailies: +55%

• 😄 Weeklies: +54%

• 🙂 Monthlies: +38%

Summary:

• Naked calls have unlimited risk

• Naked calls are bearish and do well in 🐻 markets

• Covered calls are bullish and do well in 🐂 markets

Caveats:

• ⛽ Ignores gas/swap fees/commission

• 💲 Assumes premia = LP fees

• ❓ This is hypothetical — you can't sell calls on Uniswap (Panoptic soon 🤫)

Disclaimer:

• 📢 None of this should be taken as financial advice.

• ⚠️ Past performance is no guarantee of future results!

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The world of decentralized finance (DeFi) options is evolving rapidly, and Panoptic is at the forefront of this revolution. By leveraging Uniswap V3 liquidity provider (LP) capabilities, Panoptic can create perpetual options positions. This is nothing short of pure magic! One of the most intriguing aspects of Panoptic is its ability to facilitate 0DTE strategies, which we'll explore in this blog post.

What are 0DTEs?

0DTE (Zero Days to Expiration) options are contracts that expire on the same day they are purchased. Traders usually buy or sell these contracts in the morning, hoping to repurchase or resell them at a lower price before the day ends.

Why Trade 0DTE Options?

Theta decay, the rapid decrease in option premium as expiration approaches, is a primary reason traders opt for 0DTEs. These options offer unique trading opportunities for both buyers and sellers:

• For buyers, 0DTEs can be profitable if the market moves in the preferred direction, as they are inexpensive and gain intrinsic value quickly.

• For sellers, the goal is to sell 0DTEs at a high price and repurchase them at a lower price later in the day.

So what are some of the main 0DTE Trading Strategies?

1. Directional: If you have a strong conviction about a stock's movement, you can buy calls (bullish) or puts (bearish) – suitable for buyers.

2. Non-directional: Straddles or strangles are safer strategies for both buyers and sellers, regardless of the stock's direction.

Trading 0DTEs on Panoptic

Although Panoptions don't expire, you can adjust the "width" (r) of your Panoption to correspond with Time To Expiration (TTE). This can be shown from the formula bellow:

From here, we can observe that:

• Wider range → longer TTE

• More volatility → shorter TTE

Opening a 0DTE Position on Panoptic

1. Estimate the implied volatility (σ) from historical data.

2. Invert the formula for r.

3. Open a Panoption position with TTE < 1.

While we cannot guarantee that profits will always follow, the potential for large gains is present.

Remember that 0DTEs are not without risk. Tight ranges on Panoptic mean that a position can quickly accumulate premium owed by the options buyer.

Remember to trade responsibly and consider the risks involved with 0DTE (or any kind of) options.

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Did you know the "Father of Options" circumvented 19th century usury laws via financial engineering to make $?

Let's dive into the fascinating story of how Russell Sage leveraged put-call parity to become a millionaire, and how put-call-LP parity revolutionizes DeFi options🧵

In this thread we'll:

• Show how Russell Sage made millions by subverting the law with options

• Use monkeys & bananas to explain put-call parity

• Explain why "put-call-LP" parity for DeFi options is as groundbreaking as put-call parity was for TradFi options

What's usury?

Usury, aka predatory lending, is charging an excessive rate of interest on a loan.

Historically, usury was defined as charging *any* interest on a loan and was condemned by major religions & prominent philosophers (Moses, Buddha, Muhammad, Aristotle...).

In 1867, Russell Sage was convicted of violating New York usury laws for charging an 8% annual interest rate on a late loan to a stockbroker. The penalty for Russell was $250 in fines and 5 days in prison (source here).

But this didn't deter him. Russell used his know-how of options to create synthetic loans. He developed OTC options trading on such a grand scale that he was known as "The Father of Puts and Calls", inventor of straddles & strangles, and the "Money King".

But how exactly did the "Money King"💰👑 create loans through options trading? The answer lies in a fundamental concept found in every financial textbook called "put-call parity", which can be used to create synthetic loans.

Imagine a seesaw with 4 types of fruit: apples🍏, peaches🍑, cherries🍒, and bananas🍌.

In order to stay balanced, the seesaw must have a fixed ratio of apples🍏 + peaches🍑 on one side, and cherries🍒 + bananas🍌 on the other side.

Each fruit represents a financial instrument, and the fundamental relationship between the fruits is put-call parity.

• 🍏 = asset price

• 🍑 = put price

• 🍌 = bond price

• 🍒 = call price

Put-call parity: 🍏 + 🍑 = 🍌 + 🍒

• "Mon[k]ey King"🐵👑 be like: "Me like loanshark — me want high interest rate!"

• Buying 🍌(bonds) is a fancy way of saying: "Me lend you some money in exchange for interest."

→ So 🐵👑 can loanshark by buying 🍌(bonds — in this case, high yield ones)! 🤯

But 🐵👑 couldn't legally buy bananas🍌 (bonds — the high yield ones). 🚩🚩🚩🐵👑⛓️👮

Instead, he:

• Bought apples🍏(asset)

• Sold cherries🍒 (calls)

• Bought peaches🍑 (puts)

→ Effectively purchasing bananas🍌 (bonds) to create loans at higher interest rates than was legal!

Just as "put-call parity" is fundamental to options, "put-call-LP parity" is fundamental to DeFi options.

Panoptic begins w/ the simple observation that providing concentrated liquidity in Uniswap V3 is analogous to selling options in TradFi.

LP = -Put 🤯

Let's call this observation "put-LP parity": LP = -Put (🍋 = -🍑)

Which means: -LP = Put (-🍋 = 🍑)

→ Panoptic lets you buy peaches 🍑 (puts) by selling lemons 🍋 (LPs) 🤯

How do you buy 🍒 (calls)? Answer: lab-grown synthetics!

• Put-call parity: 🍒 = 🍏 - 🍌 + 🍑

• Put-LP parity: 🍑 = -🍋

• → Combined: 🍒 = 🍏 - 🍌 - 🍋

→ You can buy 🍒 (calls) by buying 🍏 (asset), selling 🍌(bonds), and selling 🍋 (LPs)🤯

Panoptic Labs™ synthesized a new type of 🍑 and 🍒: These 🍑 and 🍒 are shelf stable because they NEVER expire!

Panoptions are a novel type of options:

• Perpetual♾️

• Oracle-free🔮

• Permissionless🤠

• Made for DeFi🔑

Summary:

• Put-call parity describes the relationship b/t puts and calls

• Russell Sage took advantage of this to make high interest loans

• Put-call-LP parity describes the relationship b/t put, calls, & LP

Disclaimer:

• 📢 None of this should be taken as financial advice

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Every day we get closer to launch! 🤩

However, we heard some of you might have some Q's regarding Panoptions:

• How are they priced?

• Are they any different from Vanilla European Options?

• Why can't we just use Black-Scholes (BSM)?

Read our #ResearchBites to find out!

OK, first things first: Panoptic is a composable, perpetual ⌛️, oracle-free 🔮, instant-settlement options trading protocol📈 built on top of Uni V3. We're doing for decentralized options what x · y = k automated market makers did for spot trading 🎯🔥

To do this, we make use of the observation that LPing in Uni V3 (i.e. LPing ranged positions) has a very similar payoff curve as selling covered calls. Buying/selling options is intimately related to adding/removing liquidity

👆 We mentioned that Panoptic is:

• Composable

• Perpetual ⌛️

• Oracle-free 🔮

These 3 characteristics make Panoptic different from other protocols! Let's describe them briefly 👇

By "composable" we mean that users can create multi-legged options positions on a single mint! This allows for a wide variety of strategies that can be adjusted to each user's needs. Wanna know more about multi-legged positions? We got you *covered* 😉

Perpetual options have no expiration date & can be exercised at any time. This makes them more flexible than vanilla options. However, they can't be priced using Black-Scholes...but their pricing is based on a model that *does not require an oracle*

Why did we choose to not rely on a price oracle 🔮?

Cons of oracles:

• Need to provide reliable data 100% of the time

• Are complex to integrate on chain

• Can be expensive to maintain

👆 Difficult in DeFi! So how do we calculate the price without oracles? 🤔

Panoptic uses an oracle-free concept called streaming premium 🤓

• No upfront payment

• Instead, buyers pay a small fee at every block to keep their position open, whenever it is near-the-money

• This per-block fee is computed from every change in price of the asset 👇

Intuitively,

• If price changes a lot, volatility + fees are big

• If it doesn't change much, volatility + fees are small

Mathematically, the total premium corresponds to integrating theta (θ) of the option over time (with θ the rate of change of the option premium, P, with respect to time), se formula below.

This corresponds to options that continuously expire at small time intervals (∆t). Does Panoptic integrate θ on-chain? No! 🙅‍♂️ In practice, this premia corresponds to the LP fees in the Uni V3 pool! Does this converge to BSM? Yes! 🤯 We can verify this w/ Monte Carlo 👇

Ok, so how do we implement this on chain? Using Uni V3-like structure!

• We keep track of fees + liquidity associated to each pos.

• As price moves, fees accumulate

• A buyer that opens at t1 & closes at t2 pays fees prop. to UniV3 fees (+ spread) between t1 & t2

  Indeed, UniV3 collects fees as

• where fgupper and fglower are the feegrouwthOutside0x128 of the upper and lower ticks in UniV3, and fginsdelast=feeGrowthInsde0lastX128, and liquidity is the liquidity owned by the protocol. In this setting, the option buyer would pay a premium as shown below to the seller:

Detailed #ResesearchBites on the implementation soon 😉

😮‍💨 We tried hiding a lot of the "mathier" details, but we hope that wasn't too much to digest! If it was, or if you want to learn more about Panoptic, you can read our white paper here.

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HODL vs. LP vs. Calls — which one's best?

• ⬇️❗HODL downside is substantial (can go to 0)

• 🧢 LP upside is capped on Uni V3 — token goes up, you now hold the other token

• 🚫🧢 Call options have unlimited upside, capped downside — but pay premia

Incoming backtest 🧵👇

Let's backtest *hypothetical* DeFi call options (wen Panoptic? 😉)

🗓️ Jun '21 - Feb '23

⚖️ Periodic rebalancing (day, week, or month)

Strategy:

• Buy at-the-money (ATM) call option

• Exercise/close at end of period

• Pay LP fees as premia

Note: Here’s how Panoptic creates a call option

📞Return breakdown on $ETH daily call options

• Payoff: 519%

• Premia: 397%

• Profit: 122% (All values are USDC)

👉Payoff > Premia → Profit🔝🤑📈

That's pretty good! How does it compare to other rebalancing periods?👇

Dailies vs weeklies vs monthlies

🌕 ETH Dailies: 122%

🧑‍🚀 ETH Weeklies: 11%

🚀 ETH Monthlies: 28%

👉Active management for the win!👈 (Keep in mind this doesn't account for gas fees⛽ — future #ResearchBites 😉)

Good returns, but can calls survive a bear market?👇

Bull vs. Bear Market

• 🐂 Bull Market: June '21 - April '22

  • 👉 Compare w/ ETH HODL return: 0.8%

• 🐻 Bear Market: May '22 - Feb '22

  • 👉 Compare w/ ETH HODL return: -41%

Not only did call options survive a bear market, they blew HODL out of the water 💎🙌🙅🏻‍♂️🌊💨

What if you had chosen another fee-tier?

Different Fee Tiers

• 🌕 ETH-USDC 5bps: 122%

• 🚀 ETH-USDC 30bps: 95%

• 🧑‍🚀 ETH-USDC 100bps: 66%

👉The 5 bps pool outperformed, here's why👇

Here's how different fee-tier pools breakdown:

• 🧾 The 5 bps pool had the least trading fees (premia)

• 🚀 The 5 bps pool had the most upward price action

👉 That's why the 5 bps pool was the most profitable!👈

Key Insights:

• 💎🙌 Calls > HODL b/c capped downside

• 🌊 Calls > LP (we tested this last time👇)

• 🐂🐻 Bull markets are best for calls, bear markets were OK

• 🚀 Bullish price action = high payoff

• 💰 Payoff > premia → profit!

Caveats:

• ⛽ Ignores gas/spread/swap fees/commission

• 💲 Assumes put option premia = LP collected fees

• ❓ This is hypothetical — you can't buy call options on Uniswap (Panoptic soon 🤫)

Disclaimer:

• 📢 None of this should be taken as financial advice.

• ⚠️ Past performance is no guarantee of future results!

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📈 Want to understand the potential risk/reward of options trading?

Look no further than the Greeks!

We'll break down Delta, Gamma, Theta, Vega, & Rho and explain how they can help you make more informed decisions when trading Panoptions 😉

The Greeks are a set of risk measures used in options trading to help investors understand the potential risks and rewards associated with their positions.

Continuing our #ResearchBites series on the Greeks, we'll discuss:

• Delta (Δ)

• Gamma (Γ)

• Theta (Θ)

• Vega (ν)

Delta (Δ) measures the rate of change of an option's price in relation to changes in the price of the underlying asset. Mathematically, Δ is the partial derivative of the option value (V) w.r.t. underlying price (S)

Ex: Δ=1 → V increases by $1 for every $1 increase in S

Δ is useful for hedging. A Δ-neutral strategy is created with a position of Δ=0.

Δ-neutral example: Straddle — simultaneously buy a call option and a put option on the same underlying asset w/ same strike. This can be done w/ #Panoptic, as discussed here:

Gamma (Γ) measures the rate of change of an option's delta in relation to changes in the price of the underlying asset. Mathematically, Γ is the second partial derivative of the option value (V) w.r.t. the underlying asset price (S).

👆🤓 Important point above:

• Unlike other options protocols, #Panoptions can be deployed with a fixed range, resulting in options with fixed Gamma.

• A capped Gamma completely eliminates pin risk! (i.e., risk of quickly switching to OTM close to expiration)

  

Theta (Θ) measures the rate of change of an option's price in relation to changes in time. It represents the time decay of an option and is particularly important for investors who use options as a short-term trading strategy (e.g. 0 DTE)

Mathematically, Θ is the partial derivative of the option value (V) w.r.t. time. Because of how #Panoptions work, their value can be understood as the integral of Θ over the price path S.

Vega (ν) measures the rate of change of an option's price in relation to changes in volatility. This is of particularly importance in our setting since:

• Crypto assets tend to be very volatile

• #Panoptions premia is related to volatility

How can we use this info to hedge our positions w.r.t. a given Greek X?

1. Compute X for your position

2. Adjust your position by buying or selling options to offset the existing Greek

3. Monitor your position & make adjustments as needed to keep neutral

👆 Again, something that we will soon be able to do with #Panoptic 😉

We will further investigate Greeks, their computation, and strategies in upcoming #ResearchBites. Stay tuned!

Disclaimer: 📢 None of this should be taken as financial advice

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Imagine a market that only lets you sell assets, never buy...Could you be profitable?

That market isn't imaginary. That market is...Uniswap Liquidity Providing!

LPing = selling options, but what if users could SHORT LP tokens and effectively BUY options...?

LP positions on Uni V3 mimic the payoff of selling put options. Uniswap users can only deposit liquidity and sell put options, which means they can only take a bullish position.

• Token goes up, LP value goes up (but capped) 🚀

• Token goes down, LP value goes down 😭

While selling options can be profitable, our backtests show that it wasn't always the case 👇

Is there a way to "short" an LP position and effectively *buy* a put option...?

We'll answer this... But first, let's simulate an options buying strategy!

For this study:

• 🗓️ Jun 2021 - Jan 2023 (20 months) where applicable

• ⚖️ Daily rebalancing

• 📏 Narrow (r = 1.05) range ↔️ 0DTE

Daily strategy:

1. Buy ATM put option by shorting LP position

2. Exercise/close put option at end of day

3. Pay LP swap fees as premia

Returns on buying $ETH put options:

• 🌕 ETH-USDC (5bps): 112%

• 🚀 ETH-USDC (30bps): 85%

• 🧑‍🚀 ETH-USDC (100bps): 57% (Returns in USDC)

👉Put option returns are exactly opposite of LP returns👈

Buying "L1/Utility token" put options:

• 🤩 $BTT (+67%)

• 😍 $GNO (+40%)

• 😊 $WBTC (+12%)

• 😦 $MATIC (-47%)

• 😢 $LINK (-86%)

• 😭 $ENS (-101%)

(Returns in ETH, see legend 👇 for pool details)

Buying "DeFi token" put options:

• 😎 $1INCH (+74%)

• 🙂 $AAVE (+10%)

• 🙂 $UNI (+10%)

• 😕 $MKR (-1%)

(Returns in ETH)

👉DeFi puts did pretty good!👈

Buying "NFT/Meme token" put options:

• 😶 $LOOKS (-9%)

• 😬 $APE (-42%)

• 😳 $HEX (-52%)

(Returns in ETH)

👉Don't "put" ⤵️ down the meme tokens👈

Key Insights:

• 🐻 Bearish price action = high payoff

• 💰 Payoff > premia → profit!

In TradFi, options buying is more profitable when Implied Volatility (IV) < Realized Volatility (RV). Do we see the same result here?

Instead of IV let's use the premia:

• Easier to calculate 🧮

• ⬆️ IV ⇔ ⬆️ Premia

Graph below:

• 🐶 Outperforming puts (green dots): lie above the line, low premia given volatility ("IV < RV")

• 😈 Underperforming puts (pink dots): lie below the line, too expensive ("IV > RV")

Is there a way to "short" an LP position and, hence, *buy* a put option?

Enter @Panoptic_xyz!

Panoptic allows you to buy *and* sell DeFi options for any crypto asset, any strike, any size.

Caveats:

• ⛽ Ignores gas/spread/swap fees/commission

• 💲 Assumes put option premia = LP collected fees

• ❓ This is a "what if" scenario — you can't buy put options on Uniswap (yet)

Question:

• ⚖️ Are LP returns in disequilibrium?

(Future #ResearchBites 😉)

Disclaimer:

• 📢 None of this should be taken as financial advice.

• ⚠️ Past performance is no guarantee of future results!

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DeFi Options Trading Is Powerful!

There can be unlimited upside…😈

But also unlimited downside 😣

Every trader should know how to create these 18 options strategies in @Panoptic_xyz for any crypto asset, any strike, any size👇

We'll cover:

1. ⤵️

2. 📞

3. 🤸🏽‍♂️

4. 🙅‍♀️😵

5. 💎🦎

6. 🦖

7. 🥌🦋

8. 📞🧈

9. 🦸‍♂️🐂

10. ⤵️🧈

11. 🦸‍♂️🐻

12. 🥌🦅

13. 📅🧈

14. ↗️🧈

15. ⚖️🧈

16. 🦇

17. 🦓

18. 🦓🦓🦓

Think $HEX is worthless?

"Put" your money where your mouth is. Buy a "put"⤵️ Panoption!

• Substantial upside 😈

• Limited downside 😋

• Bearish ⬇️

Short LP position

Want to make a "call" that $APE will go up?

Buy a "call"📞 Panoption!

• Unlimited upside 😈

• Limited downside 😋

• Bullish ⬆️

Short LP position + long asset

"Straddling" the line b/c you can't tell if $BLUR is going to go ⬆️ or ⬇️?

Buy a "straddle"🤸🏽‍♂️ on Panoptic!

• Unlimited upside 😈

• Limited downside 😋

• Delta neutral 🫥

Call + Put (same strike)

Feel like you're being strangled by excessive market volatility on $SHIB?

Buy a "strangle"🙅‍♀️😵 on Panoptic!

• Unlimited upside 😈

• Limited downside 😋

• Delta neutral 🫥

Call (higher strike) + Put (lower strike)

Feeling a "little" bullish on $UNI?

How about a "jade lizard" 💎🦎

• Limited upside 😋

• Substantial downside 😣

• Neutral-to-bullish ↗️

Short strangle + long OTM call

A variation of 💎🦎 is the "big lizard" 🦖

Sell a straddle instead of a strangle on Panoptic! Useful when you believe the price will hover around the current price.

• Limited upside 😋

• Substantial downside 😣

• Neutral-to-bullish ↗️

Short straddle + long OTM call

Think $LINK will stay rangebound?

Float like an "iron butterfly"! 🥌🦋

Like a 🦖, except you're protected on both sides.

• Limited upside 😋

• Limited downside 😋

• Delta neutral 🫥

Short straddle + long strangle

Bullish on $ETH but don't expect a huge surge?

Buy a "call spread" on Panoptic! 📞🧈

• Limited upside 😋

• Limited downside 😋

• Bullish ⬆️

Long call (lower strike) + short call (higher strike)

Are you hoping for a "Better Tomorrow"?

How about a "Super Bull"? 🦸‍♂️🐂

Like a 📞🧈, but for the more bullish among us.

• Limited upside 😋

• Substantial downside 😣

• Super-bullish ⬆️⬆️

Long call spread + short OTM put

Anon "spreading" rumors that $USDC is in trouble, but don't expect a huge drop?

Buy a put "spread" on Panoptic! ⤵️🧈

• Limited upside 😋

• Limited downside 😋

• Bearish ⬇️

Long put (higher strike) + short put (lower strike)

Look! Up in the sky! It's a bird! It's a plane!

It's "Super Bear"! 🦸‍♂️🐻

Like a ⤵️🧈, but for the more bearish among us.

• Limited upside 😋

• Unlimited downside 😳

• Super-bearish ⬇️⬇️

Long put spread + short OTM call

Think an "upcoming announcement" is gonna be a nothingburger? 🚫🍔

Take flight with a short "iron condor"! 🥌🦅

• Limited upside 😋

• Limited downside 😋

• Delta neutral 🫥

Short call spread + short put spread

Long-term bullish on $ETH but need more capital?

Buy a "call calendar spread" on Panoptic! 📞📅🧈

• Limited upside 😋

• Limited downside 😋

• Delta neutral 🫥

Long long-term call + short short-term call (same strike)

Panoptic mimics payoffs from long-term expiries through wide-ranged LP positions.

For example:

• Narrow range (r = 1.087) ↔️ 1 day expiry

• Wide range (r = 1.6) ↔️ 1 month expiry

(Assuming 100% annual volatility)

A variation of 📅🧈 is the "diagonal spread" ↗️🧈

Also called a "Poor Man's Covered call" — useful when you expect minor price movement.

• Limited upside 😋

• Limited downside 😋

• Bullish ⬆️

Long long-term call + short short-term call (different strikes)

Neutral-to-bullish, with a price target for $WBTC in mind?

Buy a "Call Ratio Spread" on Panoptic! 📞⚖️🧈

• Limited upside 😋

• Unlimited downside 😳

• Neutral-to-bullish ↗️

1 long call (lower strike) + 2 short calls (higher strike)

Expect some small price movement on $LDO but not sure which direction?

Try "BATMAN" 🦇

• Limited upside 😋

• Unlimited downside 😳

• Delta neutral 🫥

Call ratio spread + put ratio spread

Want to go long?

A "ZEBRA spread" may be what you're looking for! 🦓

A synthetic replacement for longs: ~100 delta position with very low capital requirements.

• Unlimited upside 😈

• Limited downside 😋

• Bullish ⬆️

• Capital efficient 💸

2 ITM long calls + 1 ATM short call

Bullish, but want to hedge downside tail risk?

Try "ZEEHBS"! 🦓🦓🦓

• Unlimited upside 😈

• Limited downside 😋

• Delta neutral 🫥

Call ZEBRA spread + put ZEBRA spread, this one is special 🤪

Caveats:

• Panoptions are perpetual options with streaming premia rather than upfront premia, so payoff curves may differ from above

• Panoption premia depends on a number of factors including the underlying price path and LP width

More on this later 😉 #ResearchBites

Summary:

1. ⤵️=Put

2. 📞=Call

3. 🤸🏽‍♂️=Straddle

4. 🙅‍♀️😵=Strangle

5. 💎🦎=Jade lizard

6. 🦖=Big lizard

7. 🥌🦋=Iron butterfly

8. 📞🧈=Call spread

9. 🦸‍♂️🐂=Super bull

10. ⤵️🧈=Put spread

11. 🦸‍♂️🐻=Super bear

12. 🥌🦅=Iron condor

13. 📅🧈=Calendar spread

14. ↗️🧈=Diagonal spread

15. ⚖️🧈=Ratio spread

16. 🦇=BATS

17. 🦓=ZEBRA

18. 🦓🦓🦓=ZEEHBS

Disclaimer: 📢 None of this should be taken as financial advice.

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We all know backtesting, but how about forward testing?

This is the first of a series of #ResearchBites tutorials where we discuss methods for simulating cryptos prices.

Let's explore! 🧵

🎲 We will devote the first thread in this series to the Monte Carlo (MC) method.

📈 MC method is a simulation technique used to model the behavior of complex systems like crypto prices, markets, LP positions, etc.

👆🏻 Useful when a direct prediction is not possible.

It works by repeating three simple steps:

1. Sample from a probability distribution that represents our understanding of the underlying system 🎲

2. Repeat this process many times 🔁

3. Take the average of some quantity of interest over all these simulations 🤓

👆🏻Meant to simulate events that are unpredictable & can only be simulated using random number generation. In the case of crypto, this could involve estimating values for asset volatility, drift, etc., and then using these values to simulate future price movements of an asset.

By repeating steps 1-3 multiple times, we can generate a large number of different scenarios for the future price of the asset. This allows us to understand the potential range of outcomes and estimate the likelihood of different price levels.

Let's consider a simple example:

Suppose Alice is standing at a position x0, and that she takes one step to the right or to the left each w/ 50% chance.

Questions:

• Where do we expect Alice to be after N steps?

• How likely is it for her to get 20 steps away from x0?

👆can be answered using MC!

• Simulate Alice's random path for N steps, M times (M large)

• Take the mean of her position after N steps, and the # of times she was 20 steps away from x0.

Taking M=1000, N=100 yields:

• Expected position ≈ 0.0

• Prob. 20 steps away = 6.8%

Monte Carlo simulations can also be used to generate Value-at-Risk (VaR) measures, which indicate the maximum potential loss that an investment in a crypto asset could experience over a given time horizon. Read more about VaR measures here 😉

A standard model to simulate asset prices is the so-called Geometric Brownian Motion (GBM). It assumes that the rate of change of the price of an asset follows a random walk with constant volatility and a drift term representing the expected return. In math-y terms, let S denote an asset with price process {S}. Furthermore, let μ denote the drift parameter of the price process and σ>0 its volatility, and let W denote the standard Wienner process. We say that {S} follows a Geometric Brownian motion (GBM) if {S} satisfies the following stochastic differential equation:

Given an initial price S0, it follows from Ito’s lemma that

An exemplary #Python implementation to sample a price process S modeled as a GBM is shown below 💻

• mu= drift

• sigma = volatility

• T = time horizon

• N = number of steps

• S0 = price at time 0

Let's use our code to simulate the daily ETH price for the next year!

Example: ETH price

• 🔮 We simulate 1000 prices, 1 year into the future

• 🤓 sigma = 0.845, mu = -0.47 from historical data

• 📉 95% VaR, yearly= -49%

• 📉 95% CVaR, yearly = -72%

• 🎲 Probability of price > $3,000 at any time = 12%

Comments 👆

• μ & σ influenced by the time period they're estimated (e.g., negative drift due to 📉 last April)

• Useful to reassess 👆 with different parameter values!

• VaR and CVaR are worst-case scenarios (95% confidence)👈 & useful metrics to mange risks/hedge 👇

• μ & σ can be made stochastic, too — more powerful model

• MC can be used to price options & estimate Greeks

• We used GBM model, which might not be suitable for pools or stablecoins, see👇

• Can we use MC to simulate these? We'll discuss in future #ResearchBites! 😉

Summary:

• MC is a simulation-based approach to modeling complex systems like crypto prices.

• Provides valuable insights into potential outcomes & risk levels.

• While not perfect & can be influenced by the assumptions, it remains a very valuable tool!

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