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Covered Call
Suitable when you are moderately bullish or neutral about the underlying
A covered call is an options strategy in which an investor holds the underlying and sells call options on that asset to generate income from the options premiums. This strategy is considered "covered" because the investor already owns the underlying asset and can meet the payoff of the option buyer if the covered call option expires in the money.
Selling a covered call is suitable when you are moderately bullish or neutral about the underlying. It is an ideal way to earn additional income for someone who intends to hold the underlying for longer periods but does not expect an appreciable price increase in the near term. The maximum profit potential of a covered call is equivalent to the premium received for the options sold, plus the potential upside in the underlying between the spot price at initiation and the strike price.
The user deposits the same asset as the underlying into the covered call vault. For example, if it's the ETH Covered Call vault, the user will deposit ETH. Olive then auctions the vault and collects the premium from the market maker, which increases the vault's NAV. Regardless of what happens later in the trade, as the call seller, you always get to keep the premium.
Principal Risk: It’s the risk of losing some or all of your investment. If the spot price is above the breakeven price at expiry, investors may lose some portion of their initial investment.
Credit Risk: Covered call vaults are not susceptible to credit risks as the collateral is never lent to the market markers.
Smart Contract Risk: There is a risk of smart contract failure in the underlying vault or the protocols we work with. Olive has undergone an audit by PeckShield to mitigate smart contract risk.
The fee structure consists of a 2% management fee charged on a prorated basis and a 10% performance fee which is charged only if the cycle is profitable.
Example
Suppose you invested 10,000 USDC in the FCN. The management fee is charged annually on a pro-rata basis @ 2%, i.e. 2% / 52 Weeks = 10,000 USDC x 0.02/52 = 3.84 USDC. Suppose the strategy generates 40% APY, meaning 10,000 USDC will become 14,000 USDC. An annual pro-rata performance fee of 10% will be charged on the gains, which is 4,000 GLP x 10%, i.e., 400 USDC.
Therefore, the net gain made by the users is 14,000 - 3.84 - 400 = 13,596.16 USDC, which is ~ 35.96% APY net of fees.
Example
Suppose you invested 1 WETH in the WETH Covered Call Vault. Assuming WETH is at $2000, the strike price for the call option is $2500, and the premium is at 0.0045 WETH.
The management fee is charged pro-rata annually @ 2%, i.e. 2%/52 Weeks = 1 WETH x 0.02/52 = 0.00038 WETH. Since the performance fee is only charged when the expiry happens out of the money or the week was profitable, it will equal 0.0045 x 0.1, i.e. 0.00045 WETH.
The net gain made by the users is, therefore, 0.0045 - 0.00045 - 0.00038 = 0.00367 WETH, which is ~ 20.9% APY net of fees.