Thetanut’s wheel vaults (a.k.a “options wheel strategy”) are physically settled and are designed to allow users to “Buy Low Sell High”, or to accumulate/decumulate their preferred underlying asset.
The main goal of the wheel vaults is to sell puts to receive the underlying asset at a discount & sell covered calls to sell the underlying asset at a higher price to generate an overall profit for the user.
If the wheel vault is ITM, it automatically changes from put-selling to covered calls and vice versa, which creates the “Buy Low Sell High” effect.
This strategy works best in a slightly bullish/bearish sideways market where the user can profit from the price movements of the underlying asset. This strategy does not work well when there are sudden spikes in either market direction. Therefore, this strategy requires active management from the user and is not a “set and forget” strategy.
The wheel vault(s) requires active management where the user has a slight bullish/bearish sideways market view when the strategy is utilized. Please note that the wheel strategy is ideal for users with a bullish bias toward the underlying asset. The main use case of this strategy is to profit from sideways price movements or to accumulate/decumulate their underlying asset positions.
Scenario: A user is managing a 1,000 USDC portfolio. He/she has a target price of $1,100 for ETH and ETH is currently trading at $1,500. Assuming that the market is moving sideways between $1,100 and $1,800 and the put-selling wheel vault is exercised on the 4th epoch cycle at the strike price of $1,100.
Action plan: The user can deploy 1,000 USDC into the wheel vault during its put-selling mode and generate yield in the form of USDC on for 4 epochs
The user can deploy 1,000 USDC into the wheel vault during its put-selling mode to generate yield in the form of USDC per epoch. The total premiums collected for 4 epochs like $100. On the 4th epoch, the put-sell option is exercised and the total USDC position of $1,100 ($1,000 initial deposit + $100 premiums generated) is converted into ETH at $1,100.
The user would have gained 1 ETH ($1,100 total USDC position / $1,100 strike price) through this action plan instead of 0.909 ETH (3dp) through a market limit order.
Scenario: A user is managing a 1,000 USDC portfolio. Assuming that the market is moving sideways between $1,100 and $1,800.
Action plan: The user can deploy 1,000 USDC into the wheel vault during the put-selling mode with a strike price of $1,200 to generate yield on the first epoch. At the end of the epoch, the market price of ETH is $1,100, therefore the user has bought X amount of ETH at the strike price of $1,200.
The wheel vault then automatically changes to the covered call-selling mode with the strike price of $1,700 and the user continues to generate yield on the second epoch. At the end of the epoch, the market price of ETH is at $1,800, which means the user has sold X amount of ETH at the strike price of $1,700. During this process, the user has a profit of $500 ($1,700 - $1,200) not including the premiums from the 2 epoch cycles.
The goal when utilizing the wheel vault in the put-selling mode is to collect premiums until the put-sell option is exercised, which allows the user to purchase the underlying asset at a discounted price. With a discounted price, users would be able to collect premiums while waiting for the underlying asset to be sold at a higher price when the covered-call option is exercised.
The first risk to consider when utilizing this strategy is the chance of losing potential upsides by not selling/buying the underlying asset at a more optimal price range during sudden spikes in the market in either direction:
- 1.The price of ETH is $1,500 and the strike price of the put-selling wheel vault is $1,300. There is a sudden market spike to $1,000. The user would have bought ETH at the strike price of $1,300 instead of a more optimal price of around $1,200 - $1,000.
- 2.The price of ETH is $1,500 and the strike price of the covered call wheel vault is at $1,700. There is a sudden market spike to $2,000. The user would have sold ETH at the strike price of $2,000 instead of a more optimal price of around $2,000 - $1,800.
To mitigate this risk, users can consider deploying a portion of their capital into the wheel vault if their objective is to accumulate/decumulate their underlying asset position. This allows users to constantly generate yield while accumulating/decumulating the underlying asset, and have sufficient capital to capitalize on sudden market movements in either direction.
The second risk to consider when utilizing this strategy is the chance of a net loss when profits generated from options selling do not cover the difference between the strike price of the put-sell and covered call option:
The price of ETH is $1,500 and the strike price of the put-selling wheel vault is $1,300. ETH expires at $1,000, causing the put-sell option to be exercised. Therefore the user would have collected premiums from selling the put option and bought X amount of ETH at the strike price of $1,300.
The wheel vault then automatically changes to covered call-selling mode and the new strike price of the covered call option is $1,200. (Please note the strike price selected is based on the current price of ETH trading at $1,000.) ETH expires at $1,200, causing the covered call option to be exercised. Therefore the user has collected the premium from selling the call and sold X amount of ETH at the strike price of $1,200. In conclusion, there is a net loss of ~$100 (the difference between sold put and call option minus the premiums collected).
To mitigate this risk, users should have a strong sideways market view while actively managing their positions in the wheel vault(s). It is recommended to users withdraw from their positions if there they anticipate changes in market trends.
The underlying assumption of this strategy is that the price of the underlying asset is trading in a sideways market. Therefore, based on prevailing market rates with reference to Deribit, a higher delta of 15-20 was chosen for the wheel vaults. This allows the wheel vaults to generate a higher yield per epoch in accordance with this sideways market view.
Adjustments to the strike price selection criteria are under constant review by the protocol team and feedback from the community is always welcomed.
The strike prices are selected based on these parameters bi-weekly at 0900 UTC on Fridays, when auctions are conducted.