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Basic Vaults sell out-of-money (“OTM”) European cash-settled options to accredited market makers, and generate yields for users in the form of option premiums. Vaults have pre-defined parameters (inc. strike price, delta, and tenor) – creating specific risk-adjusted yields on each vault, while also abstracting the complexity in users needing to design these parameters on their own.
Basic Vault LP Tokens represent short volatility instruments, either as short call or short put positions: - Selling covered calls (Short Call): Designed to generate income for users. - Selling cash-secured puts (Short Put): Designed to accumulate the underlying asset for users.
Basic Vault collateral denominations are based on the instrument: - For calls: Denominated in the underlying asset (i.e. $XYZ) - For puts: Denominated in $USDC
Every Friday, Thetanuts Finance conducts blind auctions for the Basic Vaults off-chain - where whitelisted accredited market makers bid to buy option contracts sold by the Basic Vaults. The winning market maker of each Basic Vault then proceeds to deposit the option premiums upfront into the Basic Vault.
Upon expiry of the contract, - Settlement Price: Thetanuts Finance references major centralised exchanges as a data source to determine settlement price - including Deribit Index (i.e. for majors), Binance Spot (i.e. for altcoins), and others (i.e. for longer tail assets). This settlement price determines whether the option contract has been struck. - Settlement: The Basic Vault would then settle with the winning market maker of that epoch, depending on whether the option contract is struck.
$XYZ-C (Call Basic Vault LP Token) and $XYZ-P (Put Basic Vault LP Token) represent fungible and transferrable tokenized Basic Vault positions – and form the backbone of all trading strategies on Thetanuts Finance v3.
Users that have deposited into the Basic Vaults will mint a Basic Vault LP Token, and can redeem the Basic Vault LP Token by initiating a withdrawal of collateral from their Basic Vault position. This Mint / Redeem mechanism also gives rise to a “Mint Price”, defined as the price of a Basic Vault LP Token when minted or redeemed from a Basic Vault.
These Basic Vault LP Tokens may be used to:
- Provide Liquidity on Lending Market: Basic Vault LP tokens can be deposited into the Lending Market to generate additional lending interest.
- Provide Liquidity on AMM: Basic Vault LP tokens can be deposited into the AMM to generate additional AMM trading fees.
- Go Long: Users interested in a long volatility position may borrow the Basic Vault LP Tokens from the Lending Market and sell them on the AMM, representing a long call or long put position.
- Close Basic Vault Position Instantly: A Basic Vault LP Token holder may sell the position on the AMM, representing an instant close of the short call or short put position without having to wait for the end of the Basic Vault epoch.