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Cash-Covered Put

Suitable when you are moderately bearish or neutral about the underlying
A cash-covered put is a financial strategy wherein USDC is deposited into the vault to sell an out-of-the-money put option. This strategy is a great way to acquire the underlying asset at a lower than the current market price if the option expires in the money.
The maximum profit potential of a cash-covered put is the premium earned while selling the put option.

How do they work?

A cash-covered put strategy can be created by depositing USDC as collateral and then selling a put option on the underlying assets such as BTC, ETH or MATIC. Covered puts can be used regularly to add several percentage points of cash income. Regardless of what happens later in the trade, as the put seller, you always get to keep the premium paid upfront.

What is the risk?

A cash-covered put entails substantial risk because the put seller is obligated to buy the underlying at the original strike price even if the underlying value is much below the strike price.
Olive cash-covered vaults, in their present design, rely on Opyn oTokens. oTokens are ERC20 token representations of an options contract, where each of them has a strike price and expiry. The vault’s collateral is locked until the expiry of the oToken. This collateral is used to pay off oToken holders in the case that the options expire in the money. Opyn options are cash settled, so if the options expire ITM, there is no transfer of the underlying: the difference between the strike and the market price at expiry will be compensated by liquidating part of the deposits. This mechanism ensures there is no credit risk.
However, smart contract risk and principal risk still exist.
Smart Contract Risk
There is a risk of smart contract failure in the underlying vault or in the protocol partners we work with, for example, pricing oracles. We aim to reduce smart contract risk by - undergoing frequent audits, organising bug bounties and by only interacting with other audited DeFi protocols.
Principal Risk
If the underlying asset of the covered call tumbles ~ more than 30% within a week, the put options seller will be obligated to buy the underlying asset at the strike price.

How sustainable and scalable is Covered Call?

Cash-covered put's scalability and sustainability depend on the depth of the derivatives market. The global derivatives market being $1.2 quadrillion means we can sustainably scale to a large TVL before the yields start to get affected by our size. We also constantly look to onboard top market makers so that we can get the best quotes on our strategies.

Fees

The fee structure consists of a 2% management fee and a 10% performance fee. The management fee is applied as a percentage of the total assets in the vault, while the performance fee is applied to the premium received or yield generated by the vault every week.
Example
Suppose you invested 10,000 USDC in the ETH cash-covered put vault. Assuming ETH is at $2000, the strike price for the weekly put option is $1400, and the premium is 75 USDC.
The management fee is charged pro-rata annually @ 2%, i.e. 2%/52 Weeks = 10,000 USDC x 0.02/52 = 3.84 USDC. Since the performance fee is only charged when the expiry happens out of the money or the week was profitable, it will equal 75 USDC x 0.1, i.e. 7.5 USDC.
Therefore, the net gain made by the users is 75 - 3.84 - 7.5 = 63.66 USDC, which is ~ 39.09% APY net of fees.