Covered Calls Vaults

TLDR: Strategy for hodlers of non-stablecoin tokens

Introduction

Users holding non-stablecoin tokens can deploy them into their respective Weekly Call Vaults. The vaults sell out-of-the money call options equal to the sum of all deposits in the vault every Friday at ~8.30am UTC, hence the term "Covered". Out of the money means the "strike", or target price of the contract, is higher than the current market price of the asset.

The source of the yield is from the premium received from the buyers of the options that the vault sells.

Covered => both asset and option notional are equal :

Vault has 100 BNB and Vault sells BNB call options of 100 BNB notional

Out-of-Money Call Options:

Vault will sell a call option with a strike price higher than the current market price of the underlying asset.

Payoff

Best Case: At expiry, if the price of the underlying token is LOWER than the strike price, the user earns the full premium paid by the option buyers and the option buyer's option becomes worthless.

Worst Case: At expiry, if the price of the underlying is HIGHER than the strike price, while the user earns the full premium paid by the option buyers, there is appreciation in the option buyer's option which they will exercise and this appreciation is deducted from the vault.

Strike Selection

To reduce the risk of the options being exercised the smart contract will algorithmically select strikes with a delta value of ~10, which roughly equates to a 10% probability of the contract getting exercised.

To simplify:

The delta of an option is generally considered to be similar to the probability that an option will be exercised

Tenor/Duration

Bonsai Strike's vaults have a weekly tenor, which means they last for one week. Thus, your collateral is locked for a week, after which you are free to withdraw it together with your earned premium. If you do not withdraw it, it will be automatically enrolled in the next cycle together with the premiums, compounding the yield and locking it up for another week.

We may launch new vaults with longer tenors depending on community demand.

Underlying Assets

On launch day, we will have vaults for BNB, but will be adding more vaults over time according to demand and the community.

User View of Underlying

A covered call strategy is used as a yield enhancing strategy. User want to hold the underlying asset for the long term. The underlying view of the underlying during the tenor of the vault should be slightly bullish but trending below the strike price.