What Are Options Vaults and When Should I Use Them?

Vaults provide yield and directional exposure with automated DeFi options strategies. But how and when should I use them?

DeFi vaults are pre-packaged strategies that execute themselves automatically to generate yield for depositors.

Some DeFi vaults are set-and-forget yield generators, whereas others may be looped (leveraged) degen strats designed for maximum returns.

Options vaults on the other hand are valuable tools that allow users to express their market sentiment – be it bullish, bearish, or crabbish – for different timeframes. Deposit WETH, get more WETH. And some extra PREMIA rewards in the process.

But what really goes on under the surface of a flashy front-end? Let’s take a look.

What Are DeFi Option Vaults?

DeFi options vaults, simply known as Strategy Vaults on Premia, are automated options-underwriting strategies.

Well, that’s the gist of it anyway. Under the surface, there are multiple failsafes and parameters that limit the applied risk of outright options-selling. After all, blindly shorting options with no regard for the current market conditions doesn’t really sound like a good idea.

Vaults on Premia Blue only underwrite options within a specific range of maturities and strike prices that are calculated regularly based on current market conditions. Also, while sold options are priced with a proprietary Black-Scholes model, there’s a scaling premium based on the utilization level of a given vault that ensures the risk-reward profile remains worth it.

For example, if the liquidity inside the WETH Cash-Secured Put Vault is 90% utilized, the options it underwrites will be slightly more expensive than they would be if utilization was only at 30%. 

Now, let me quickly talk about the specific strategies executed by the Short Volatility vaults on Premia: Covered Calls and Cash-Secured Puts.

Covered Calls

These vaults automatically sell covered calls to earn premiums by shorting volatility.

A covered call means underwriting (selling) a call option on a token that you already own. For example, if I hold 1 WETH and sell 1 WETH call option, that’s a covered call. Simple enough right?

This strategy generates maximum profit if the sold call options expire worthless out-of-the-money (OTM). It’s important to note that whilst these short-volatility vaults don’t buy options back before expiration, traders that have purchased options from vaults are still able to sell them to open quotes on the orderbook.

Cash-Secured Puts

These vaults automatically sell cash-secured puts to earn premiums by shorting upside volatility.

A cash-secured put means underwriting a put option collateralized by cash, or in this case, stablecoins. If WETH is trading at $3,500, I need 3,500 USDCe as collateral.

Similarly to covered calls, this strategy nets maximum profit if the sold put options expire OTM. 

Although both strategies are very effective in low-volatility markets, they also have their individual properties. Covered calls are great when price goes sideways or down, whereas cash-secured puts work best when price goes sideways or up.

Anyways, that’s the gist of it. Let’s talk about some practical situations where one might want to employ these vaults.

When Should I Use Options Vaults?

Depending on a trader’s portfolio and current strategy, there are a couple different scenarios where one might consider using strategy vaults.

  1. Yield in a stagnant market: Strategy vaults are great for producing semi-predictable yield and liquidity mining rewards in muted vol regimes.

  2. Directional long-term exposure: The covered call vaults allow users to maintain exposure to the underlying token, assuming prices grind upwards (not too fast!)

  3. Actively hedged underwriting strategies: Depositors are able to view the exposure their position has taken on, allowing them to hedge that exposure elsewhere and capture a profitable spread.

  4. Short-term bias expression: If a trader believes that prices will fall in the short-term, but wishes to maintain exposure to the underlying token, they can deposit into a covered call vault to earn extra yield from their market bias.

That’s just off the top of my head. More creative users are likely to find use cases outside of those I mentioned by utilizing DeFi-native strats! 

You should now have a solid grasp on when and why vaults are useful — congrats if you made it this far! Below you can find a step-by-step walkthrough for deposits to strategy vaults.

How to Use Strategy Vaults

  1. Navigate to app.premia.blue/vaults

  2. Sign in using your wallet and connect to Arbitrum

  3. To sell call options, choose a Covered Call vault. To sell put options, choose a Cash-Secured Put vault.

  1. Enter the amount of the underlying token (Covered Call vault) or USDCe (Cash-Secured Put vault) you want to deposit

  1. Accept the transaction in your wallet, and you’re done! Your position is now accruing a proportional amount of PNL and PREMIA Options Liquidity Mining rewards from the vault.

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