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Mechanics

Overview of Mechanics

While strategies on Thetanuts Finance have traditionally centred around the sell-side, Thetanuts Finance v3 will enable buy-side strategies as well - allowing users to go long or short on on-chain options. This section will cover the mechanics of a Long, Short, Close Now, and Close Upon Expiry trade lifecycle.

Short Volatility

A short volatility position on Thetanuts Finance represents holding of a Basic Vault LP Token. - Short Call: $XYZ swapped for $XYZ-C on the AMM, with $XYZ-C representing a short call. - Short Put: $USDC swapped for $XYZ-P on the AMM, with $XYZ-P representing a short put.

Long Volatility

A long volatility position on Thetanuts Finance sees a number of steps within the v3 architecture in order to achieve long exposure. Long Call $XYZ collateral deposited into the v3 Lending Market. A flash loan for $XYZ-C occurs at a 95% LTV on the Lending Market, with up to 20x of collateral value borrowed. Borrowed $XYZ-C is sold for $XYZ in the AMM, achieving a long call position.
Long Put $USDC collateral is supplied into the v3 Lending Market. A flash loan of $XYZ-P occurs at a 95% LTV on the Lending Market, with up to 20x of collateral value borrowed. Borrowed $XYZ-P is sold for $XYZ in the AMM, achieving a long put position.
What happens when there is insufficient liquidity to Long Call or Long Put?
  • If there is insufficient $XYZ-C / ($XYZ-P) in the Lending Market, a long call / (long put) trade may fail.

Close Now

Users on Thetanuts Finance v3 can opt to Close Now on their open positions, which has the effect of closing their positions instantly.
Short Call Swap $XYZ-C to $XYZ on the AMM. If there is insufficient liquidity in the AMM to facilitate a Close Now, the user can instead close the position Upon Expiry instead.
Short Put Swap $XYZ-P to $USDC on the AMM. If there is insufficient liquidity in the AMM to facilitate a Close Now, the user can instead close the position Upon Expiry instead.
Long Call Thetanuts Finance v3 will route the order to the venue with the best pricing, by querying both the Basic Vaults (for Mint Price) and the AMM (for AMM Price).
  • If AMM Price is more favourable, $XYZ is sold in the AMM for $XYZ-C, with the $XYZ-C loan then being returned to the Lending market – thereafter, the initial $XYZ position is then withdrawn from the Lending market.
  • If Mint Price is more favourable, $XYZ will be deposited into the Basic Vault to mint $XYZ-C, with the loan being returned and $XYZ collateral in the Lending market redeemed.
  • $XYZ in excess of loan repaid represents P&L.
Long Put Thetanuts Finance v3 will route the order to the venue with the best pricing, by querying both the Basic Vaults (for Mint Price) and the AMM (for AMM Price).
  • If AMM Price is more favourable, $USDC is sold in the AMM for $XYZ-P, with the $XYZ-P loan then being returned to the Lending market – thereafter, the initial $USDC position is then withdrawn from the Lending market.
  • If Mint Price is more favourable, $USDC will be deposited into the Basic Vault to mint $XYZ-P, with the loan being returned and $USDC collateral in the Lending market redeemed.
  • $USDC in excess of loan repaid represents P&L.

Close Upon Expiry

Alternatively, users on Thetanuts Finance v3 can opt to Close Upon Expiry their open positions - which closes the position at the end of the epoch.
Short Call The user closes the Short Call (i.e. $XYZ-C) at the end of the Basic Vault epoch, and claims the collateral after the epoch ends. Short Put The user closes the Short Put (i.e. $XYZ-P) at the end of the Basic Vault epoch, and claims the collateral after the epoch ends.
Long Call At the end of the epoch, $XYZ position is deposited into the Basic Vault to generate $XYZ-C – which is used to repay any outstanding debt in the Lending Market. $XYZ in excess of loan repaid represents P&L.
Long Put At the end of the epoch, $USDC position is deposited into the Basic Vault to generate $XYZ-P – which is used to repay any outstanding debt in the Lending Market. $USDC in excess of loan repaid represents P&L.

Considerations for Long Positions on Thetanuts Finance v3

  • Theoretical Leverage: While the theoretical leverage based on a 95% LTV is 20x, leverage on Thetanuts Finance v3 is typically in the range of 15–20x — as a result of slippage, price impact, and fees on the AMM.
  • Managing Borrowing Costs: Leveraging in this manner carries inherent risks. The triggers for a soft close of a user's position on Thetanuts Finance v3 are the accumulating costs from borrowing (i.e. option premiums) rather than market volatility — where a soft close occurs when the user runs out of collateral. This is possible given that value of the borrowed asset (i.e. XYZ-C or XYZ-P) can increase due to option premiums and lending interest payments, and the fact that each lending position utilizes the underlying asset as collateral.
  • Automatic Rollover: Positions not closed at the end of the epoch will automatically roll over to the new epoch, with any P&L captured in the user’s net position in the lending market.
  • Protocol Solvency: Basic Vaults in Thetanuts Finance are 100% collateralized.

Arbitrage Opportunities on Thetanuts Finance v3

The same Basic Vault LP Token will have both a Mint Price and an AMM Price, which may result in an arbitrage opportunity if they do not trade at the same level. This scenario occurs when the Mint Price > AMM Price for a Basic Vault LP Token, where a user could arbitrage this by:
  • For Calls: Deposit $XYZ in the Basic Vault to mint $XYZ-C; with exposure on Thetanuts Finance v3 achieved by going short call on XYZ. Sell $XYZ-C directly on the AMM, receiving $XYZ.
  • For Puts: Deposit $USDC in the Basic Vault to mint $XYZ-P; with exposure on Thetanuts Finance v3 achieved by going short put on XYZ. Sell $XYZ-P directly on the AMM, receiving $USDC.