Maximizing Profits: Buying Put Options on 16 Uniswap Pools

What if you could buy puts by shorting LP positions?

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...?

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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 😭

Guillaume Lambert | gee-yohm.eth | 🦇🔊 @guil_lambert

Let's try to clear some misconceptions about providing liquidity in Uniswap v3: 🟣Uni v3 LPs aren't making markets, they're selling cash-secured puts.

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!

Panoptic @Panoptic_xyz

3/11 Bad pools 😔 (but can you spot the good pool 🐶?) • ETH-USDC (5bps): -18% • ETH-DAI (30bps): -14% • ETH-USDC (30bps): -12% • ETH-USDT (30bps): -11% • ETH-USDC (100bps): -9% • ETH-USDC (1bp): -6% • ETH-USDT (5bps): -3% • ETH-DAI (5bps): +7% (Returns in stablecoin)

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.

Panoptic @Panoptic_xyz

1/25 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: ❤️ & rt 👇

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 😉)

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Disclaimer:

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

• ⚠️ Past performance is no guarantee of future results!