Covered Calls for TrueFi Treasury & Whales

Proposals
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Covered Calls for TrueFi Treasury & Whales

TL;DR

Larger TRU holders such as the treasury and whales can lend TRU and earn upfront cash compensation by using so called “covered calls” (see: https://en.wikipedia.org/wiki/Covered_option). Such a strategy can also be useful in the context of this proposal (see: https://forum.truefi.io/t/improving-tru-onchain-liquidity/1634) to diversify into stables and use them to build sticky DEX liquidity.

Context

MYSO is a DeFi protocol allowing users to lend one token (loan leg) against another one (collateral leg) without liquidation. The protocol has been used by several whales and treasuries to carry “covered calls” (see: https://en.wikipedia.org/wiki/Covered_option), a yield enhancement strategy in which tokens are loaned at a pre-agreed duration and fixed strike price and stablecoins are earned upfront in return. All covered calls are settled fully on-chain, without counterparty risk.

TRU Covered Calls

Current indicative premiums for TrueFi covered calls are relatively high, providing an attractive opportunity for the TrueFi treasury and whales to generate significant stablecoin revenue. For example, lending $100k of TRU for 30 days and with a relative strike of 110% could generate around $7,100 USDC in upfront premium. If after 30 days the TRU price doesn’t increase by more than 10% then all TRU tokens are returned, else the user receives $110k USDC (=conversion amount for 110% strike). Note that tenors and strike levels are fully customizable.

[Figure 1: Example Payoff Diagram for a TRU Covered Call with 30 Days Tenor and 110% Strike]

Below is a matrix showing indicative quotes for lending $100k worth of TRU for different durations and strike combinations. Generally, the longer the loan, the more upfront premium one can generate. Similarly, the lower the upside cap, the higher the premium.

[Figure 2: Indicative Premiums for TRU Covered Calls across various Tenor and Strike Combinations.]

Market Entry

TRU’s current high volatility level creates an interesting market entry opportunity to benefit from covered calls. This is because, generally, the higher the volatility of an underlying the higher the premium one can capture from writing call options.

[Figure 3: TRU Historical Volatility Distirbution]

The chart below illustrates how a TRU covered call for 30 days and with a 110% strike (and assuming ~7% premium) would look like if entered today.

[Figure 4: TRU Price and Volatility over Time]

Proposal

Carry out a covered call an initial size of $100k-500k of TRU, for either one of the following configurations/parameterizations:

  • tenor: 30 days, strike: 100%
  • tenor: 30 days, strike: 110%
  • tenor: 30 days, strike: 120%
  • tenor: 60 days, strike: 100%
  • tenor: 60 days, strike: 110%
  • tenor: 60 days, strike: 120%

Previous Work

MYSO has already worked together with several whales and treasuries in carrying out bespoke covered calls. For example, MYSO successfully completed a covered call with the Evmos treasury (see: https://medium.com/mysofinance/myso-evmos-treasury-debut-covered-call-strategy-512f6f9b2226). Similarly, MYSO has also helped facilitate covered calls for Telos (see: https://medium.com/mysofinance/myso-x-telos-treasury-covered-call-strategy-launch-59f3a993dca7), DIA, Beam, and Liquity.

What’s noteworthy about MYSO is that all covered calls are settled fully on-chain without counterparty risk (transactions are fully collateralized with stables) and at individualized bespoke terms. Moreover, MYSO can assist with price comparison across institutional trading firms (see: https://forum.truefi.io/t/proposal-launch-asset-vault-and-implement-option-trading-strategy-for-tru-tokens/1546?u=ryan.rodenbaugh), serving as a credibly neutral trustless execution layer.

Process Steps

Given that the DAO supports doing this initial pilot, the process for carrying out the covered call is straightforward:

  • Step 1: treasury creates a non-custodial lender vault on https://app.myso.finance (multi-sig support is also available via the UI/walletconnect).
  • Step 2: treasury funds TRU to its vault.
  • Step 3: in parallel, get firm quotes from institutional trading firms for previously mentioned covered call parameterizations.
  • Step 4: select most favorable quote and create matching on-chain offer.
  • Step 5: trading firm takes on-chain offer and trade is done; DAO can immediately withdraw upfront premium.
  • Step 6: at expiry of covered call, DAO receives either TRU back or conversion amount.

About MYSO

MYSO Finance originated out of the ETHOnline Hackathon in 2021, where it was awarded as one of the finalists (see: https://ethglobal.medium.com/ethonline-2021-8bd473b78b99). MYSO closed a $2.4M seed round (see: https://medium.com/mysofinance/myso-closes-2-4m-seed-round-2f4f8114144e) in 2022 with several crypto-native investors such as HashKey, Wintermute, Nexo, and GSR. The team behind MYSO (see: https://www.myso.finance/about) comes from a varied background of traditional finance and engineering.

Audits

  • Trail of Bits: https://github.com/trailofbits/publications/blob/master/reviews/2023-04-mysoloans-securityreview.pdf
  • Statemind: https://github.com/statemindio/public-audits/blob/main/Myso%20Finance/2023-08-15_Myso_v2.pdf
  • Omniscia: https://omniscia.io/reports/myso-finance-lending-protocol-644911cef1412d00142bf698/

Other Links

  • dApp: https://app.myso.finance
  • FAQ: https://mysofinance.notion.site/Lending-via-Covered-Calls-FAQ-a47b5b24d7ef4882836e0469dbf8ffe1
  • Github: https://github.com/mysofinance/v2
  • Twitter: https://twitter.com/MysoFinance
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Figure 1
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[Figure 1: Example Payoff Diagram for a TRU Covered Call with 30 Days Tenor and 110% Strike]

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Figure 2
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[Figure 2: Indicative Premiums for TRU Covered Calls across various Tenor and Strike Combinations.]

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TRU Historical Volatility Distirbution.
TRU Historical Volatility Distirbution.1460×544 69.7 KB

[Figure 3: TRU Historical Volatility Distirbution.]

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TRU Price and Volatility over Time.
TRU Price and Volatility over Time.1460×864 162 KB

[Figure 4: TRU Price and Volatility over Time.]

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How can we mitigate TRU price risk during the term of the covered call, especially in situations where the price of TRU falls significantly below the strike price of the call? Furthermore, how can we ensure that the liquidity of the TRU market is sufficient to facilitate the sale of covered calls at fair prices, even in unfavorable market conditions?

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Thank you for your questions, Magnata.

How can we mitigate TRU price risk during the term of the covered call, especially in situations where the price of TRU falls significantly below the strike price of the call?

In the event of a decline in the TRU price, the covered call strategy will consistently outperform a buy-and-hold approach. For instance, we recently executed a covered call with Telos, and you can observe how the value of the covered call position compares to a simple hold strategy here. Note the comparison between the underlying price (represented by the black line) and the covered call position value (illustrated by the blue line), which is elevated by the upfront premium. This implies that as long as the break-even price (strike price + premium) is not breached, the covered call will yield superior results compared to a buy-and-hold strategy. Furthermore, even in the very unlikely situation where the underlying price was to drop to zero, the covered call would still yield better results than holding the underlying, given that the upfront premium is received regardless.

Illustration of covered call vs buy and hold.
Illustration of covered call vs buy and hold.712×422 74.1 KB

…how can we ensure that the liquidity of the TRU market is sufficient to facilitate the sale of covered calls at fair prices, even in unfavorable market conditions?

Liquidity shouldn’t be an issue to facilitate TRU covered calls in size. For example, today’s TRU 24-hour trading volume on Binance was +$10m, which is several times higher than a standard covered call size of between $100k-$1m notional. Practically speaking, we would be reaching out through our network of institutional trading firms to ask them up to which notional amount they’d be able and willing to quote and at which premium.

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The Cicada Team is supportive of this proposal as we see a number of complementary opportunities. In full disclosure, we have been working with the MYSO team in the background about ways to make MYSO more capital efficient for Market Makers while also creating better risk-controlled lending opportunities.

In terms of direct benefits to TrueFi, (1) integrating Truefi’s T-Bill product as the stablecoin collateral underlying these transactions is a near-term opportunity. (2) DAO income as outlined by Aetienne. And (3) the ability to ring-fence assets in smart contracts to improve credit quality for future Credit Vaults/LOCs.

As such, we see enormous value in developing these types of deals for the benefit of the DAO and its Lenders.

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We would like to follow-up on this opportunity and share the latest indicative quotes for TrueFi covered calls (please see image below). We’d be happy to get firm quotes for the TrueFi treasury as well as any larger TrueFi token holders interested in executing a covered call strategy.

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Attached is also a link to a document outlining how users can get started with doing a covered call through MYSO: How to do Covered Calls on MYSO. The MYSO v2 protocol enables bespoke… | by Aetienne | MysoFinance | Apr, 2024 | Medium

Moreover, we also wanted to bring the TrueFi communitie’s attention that MYSO Finance is currently conducting an airdrop, where part of the airdrop is allocated towards potential covered call prospects. Several TrueFi token holders are eligible for this, for more info pls refer to this google spreadsheet: MYSO Covered Call Airdrop - Google Sheets