What's the Most Capital Efficient Options Selling Strategy?
70% of people got it wrong!
Maximizing your potential returns with minimal capital? ๐ฐ It's not magic, it's capital efficiency! ๐ฎ
๐ช๐ Weโll 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? Donโt worry, weโll ELI5 (๐ต๐๐)!
Imagine a conveyor belt of small bananas ๐. As the bananas ๐ pass through the magic box ๐ฆ, they turn into GIANT bananas ๐๐.
Small banana ๐ = initial investment
GIANT banana ๐๐ = funds you control
๐= Panoptic's collateral tracker
Let's look at the formula๐
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 ๐๐ are pretty efficient...Naked Call ๐๐ = sell 1 call:
https://twitter.com/Panoptic_xyz/status/1641834029581492225
Collateral: 0.2 ETH
Notional Value: 1 ETH
โ Capital Efficiency: 5x ๐
That's very capital efficient ๐, but also risky ๐ณ: naked calls have infinite risk ๐
Let's compare with covered calls!
Strategy #2 - Covered Call
Covered Call ๐๐ป๐ = sell 1 call + hold asset:
https://twitter.com/Panoptic_xyz/status/1641834042512543745
Collateral: 1 ETH
Notional Value: 1 ETH
โ Capital Efficiency: 1x ๐
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 Manโs Covered Call
Poor Man's Covered Call (PMCC) โ๏ธ๐ง is a synthetic covered call. It's like a covered call, but you don't need to hold the underlying asset. PMCC โ๏ธ๐ง = sell 1 call + buy 1 call:
https://twitter.com/Panoptic_xyz/status/1628530324262223872
Collateral: 0.2 ETH + ~0.1 ETH
Notional Value: 2 ETH
โ Capital Efficiency: ~6.66x ๐
(Note: the collateral for buying the call is slightly larger than 0.1 ETH. This is because there is an โin-the-money amountโ 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 ๐คธ๐ฝโโ๏ธ = sell 1 call + sell 1 put:
Collateral: 0.2 ETH + 0 ETH
Notional Value: 2 ETH
โ Capital Efficiency: 10x ๐คช
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 โtestedโ 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). ๐คฏ
https://twitter.com/guil_lambert/status/1593370796650545153
Summary
In order of capital efficiency:
Straddle
Poor Man's Covered Call
Naked Call
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 ๐)
Disclaimer:
๐ข None of this should be taken as financial advice.