nickgallick On-Chain Options & Structured Products
Options Fundamentals
Call option: right to BUY at strike. Value = max(spot - strike, 0) at expiry.
Put option: right to SELL at strike. Value = max(strike - spot, 0) at expiry.
Premium = intrinsic value + time value
Intrinsic: max(spot - strike, 0) for call
Time value: uncertainty that it could become more valuable before expiry
Greeks:
Delta (Δ): dOption/dSpot — how much option price moves per $1 spot move
Gamma (Γ): dΔ/dSpot — how fast delta changes (convexity)
Theta (Θ): dOption/dTime — time decay (options lose value as expiry approaches)
Vega (ν): dOption/dVolatility — sensitivity to implied volatility
Rho (ρ): dOption/dRate — sensitivity to interest rates (small for crypto)
Black-Scholes On-Chain
library BlackScholes {
// Approximate Black-Scholes using integer math
// Full BS requires ln(), e^x, N() (cumulative normal distribution)
// All approximated for Solidity
function callPrice(
uint256 S, // Spot price (WAD)
uint256 K, // Strike price (WAD)
uint256 T, // Time to expiry in seconds
uint256 sigma, // Implied volatility (WAD, e.g., 0.8e18 = 80% vol)
uint256 r // Risk-free rate (WAD, e.g., 0.05e18 = 5%)
) internal pure returns (uint256 price) {
// T in years
uint256 t = T * 1e18 / 365 days;
// d1 = [ln(S/K) + (r + σ²/2) × t] / (σ × √t)
int256 d1 = _calcD1(S, K, t, sigma, r);
int256 d2 = d1 - int256(sigma * _sqrt(t) / 1e18);
// C = S × N(d1) - K × e^(-r×t) × N(d2)
price = S * _normalCDF(d1) / 1e18
- K * _expNeg(r * t / 1e18) * _normalCDF(d2) / 1e36;
}
// Abramowitz and Stegun approximation for N(x)
function _normalCDF(int256 x) internal pure returns (uint256) {
// Accurate to 7.5×10^-8
// ...polynomial approximation...
}
}
Lyra AMM (Options Market Making)
Lyra's innovation: AMM that quotes options using Black-Scholes + dynamic hedging
1. LP deposits collateral (USDC) → provides options liquidity
2. Trader buys call option → Lyra quotes price using BS + IV surface
3. Lyra's AMM now has net delta exposure (it's short a call)
4. Lyra hedges: buys underlying spot to become delta-neutral
5. As vol changes, LP position value changes (vega exposure)
6. Lyra charges a fee for the vega risk
LP risks:
- Vega risk: if vol increases, LP loses
- Gamma risk: large price moves hurt LP
- Skew risk: demand imbalance (everyone buying calls) → one-sided risk
Options Vaults (Structured Products)
Covered Call Vault
contract CoveredCallVault is ERC4626 {
// Strategy: hold ETH + sell weekly call options
// Users deposit ETH → vault sells OTM calls → earns premium
// If ETH doesn't moon above strike: keep premium (positive yield)
// If ETH moons: upside capped at strike price
uint256 public strikePrice; // Set weekly by governance/oracle
uint256 public optionExpiry; // Friday 8:00 UTC
uint256 public premiumAccrued;
function startNewEpoch() external onlyKeeper {
// 1. Settle previous week's options
_settleExpiredOptions();
// 2. Calculate new strike (e.g., 10% OTM)
uint256 spotPrice = oracle.getPrice();
strikePrice = spotPrice * 110 / 100; // 10% out of the money
// 3. Sell calls at the new strike (to options buyers)
uint256 premium = _sellCalls(strikePrice);
premiumAccrued += premium;
optionExpiry = block.timestamp + 7 days;
}
// Distribute accumulated premiums to LP depositors
function harvestPremiums() external {
// Convert premiums to more ETH → reinvest
// Share price appreciation = yield to LPs
}
}
Put Selling Vault (USDC-denominated)
Users deposit USDC
Vault sells ETH puts (OTM) → earns premium
If ETH stays above strike: keep premium (~15-30% APY)
If ETH crashes below strike: vault buys ETH at strike (buying the dip)
Risk: "picking up pennies in front of a steamroller"
Steady income until black swan event → large loss
Panoptic (Perpetual Options on Uniswap V3)
The most novel options primitive:
Key insight: A Uniswap V3 LP position IS equivalent to a short option.
- LP at range [1900, 2100] while ETH = $2000:
- If ETH goes to $2100 → LP is fully in USDC (you sold ETH at $2100 = short call)
- If ETH goes to $1900 → LP is fully in ETH (you bought ETH at $1900 = short put)
- LP earns fees while in range = option premium
Panoptic makes this explicit:
- "Panoption seller" = normal LP position (earns fees)
- "Panoption buyer" = borrows the LP position, pays fees for the "option premium"
- No expiry: as long as fees are paid, position stays open
- The fee rate IS the options premium
- This creates perpetual options with market-determined IV
For Agent Sparta — Yield on Idle Prize Pool Capital
While prize money sits locked waiting for challenge resolution (1-7 days), it can earn yield:
contract YieldBearingPrizePool {
// Idle USDC earns yield during the challenge period
IPool aave = IPool(AAVE_POOL);
IERC20 usdc = IERC20(USDC);
IERC20 aUsdc = IERC20(AUSDC);
function lockPrizePool(bytes32 challengeId, uint256 amount) external {
usdc.safeTransferFrom(msg.sender, address(this), amount);
usdc.approve(address(aave), amount);
aave.supply(address(usdc), amount, address(this), 0); // Deposits to Aave → earns ~5% APY
prizePoolDeposited[challengeId] = amount;
prizePoolTimestamp[challengeId] = block.timestamp;
}
function payWinners(bytes32 challengeId, address[] calldata winners, uint256[] calldata shares) external {
uint256 aBalance = aUsdc.balanceOf(address(this));
aave.withdraw(address(usdc), aBalance, address(this)); // Withdraw principal + interest
uint256 principal = prizePoolDeposited[challengeId];
uint256 interest = aBalance - principal;
// Pay winners their share of principal
for (uint i = 0; i < winners.length; i++) {
usdc.safeTransfer(winners[i], principal * shares[i] / 10_000);
}
// Interest → protocol treasury or split with participants
usdc.safeTransfer(treasury, interest);
}
}
// On a $100K prize pool with 7-day challenge:
// Aave yield: ~5% APY = 5% × 7/365 × $100K = ~$96 interest
// Not huge but adds up at scale