Using Covered Calls to build runway in a bear market

TLDR: DAOs can take advantage of low asset prices to sell covered calls to their community as a win-win way for the DAO to earn up front yield on tokens in USDC, transparently and responsibly convert tokens at scale to USDC, and allow communities to profit from future token appreciation in excess of hodling.

Web3 and DAO treasuries have taken a substantial hit in recent weeks. Asset prices globally are down and inflation is up. Some DAOs, such as 1Hive, were able to utilize diversification strategies during the peak of last cycle to convert their native tokens to stable coins, to build up that emergency runway, but most did not. It has never been more apparent of how important diversification is. It may seem like there is nothing left to do, because selling tokens at these prices may only further exacerbate the problems and put additional sell pressure on token prices, especially when buyers are becoming more scarce until things settle down. However, I believe there is still one great option to deploy native DAO tokens to earn yield and responsibly convert them to stable coins: long dated covered calls.

Background: Hedgey Finance launched the ability for any DAO to deploy a covered calls market (pair of token <> usdc), across any EVM. Covered Calls are derivatives, commonly referred to as Options, where the Seller of the call is Selling (and receiving payment for) the Right (for the Buyer) to purchase X amount of Tokens at a specific Price per token before a specific Date. Simply what this means is that as the seller, I am getting paid up front in USDC, and locking my native tokens in the DeFi protocol where the buyer can purchase those tokens from me at our agreed upon price anytime before the expiration date. When the buyer buys my tokens, referred to as ‘exercising the call’, they pay me the agreed upon USDC to purchase the tokens. If the call expires (doesn’t get exercised before the expiration date), then I just get my tokens back and can deploy and sell another covered call.

While traders may think of covered calls as a strictly day trading strategy, for the DAO<>community relationship, they can be a very powerful tool that does not require constant trading. Rather than a short term speculative toy, selling 3 - 6 month (or longer) dated covered calls has the power to align benefits and incentives of a DAO and its community.

Good for the DAO: DAOs would be selling covered calls to 1) earn some yield in USDC on their native tokens today and 2) responsibly and transparently convert those tokens to USDC at a higher price than current market prices at some point in the future. This strategy does a lot of things:

  • Creates immediate stable coin liquidity
  • Transparently and responsibly converts tokens to stable coins as price appreciates - at publicly known price levels
  • When converted, builds a real runway of stable coins, generating true diversification of the treasury
  • Builds trust with the community and investors, while also giving them the opportunity to profit

Good for the community: On the flip side are the buyers of the covered calls offered by the DAO - the community (and other investors). While many have seen their portfolios suffer recently, buying long dated covered calls is a way for the community to pay significantly less up front to get significantly more leverage on the token appreciation in the future. As an example, lets suppose we are interested in buying 100 of token X, currently priced at $5. We can purchase those tokens for $500. Alternatively, if DAO_X is selling a covered call of 100 tokens, with a strike of $7.5 and premium of $50 we could purchase that instead at 1/10th of the cost. Without getting into the weeds, if the price of X goes to $10, then we’ll have gained 100% on the Hodl strategy but 200% on the options strategy, and if it goes to $15: 200% on the Hodl strategy but a whopping 1,400% on the options strategy. As prices have dropped so swiftly, this is a great opportunity to purchase at a discount - and buying long dated covered call options will render even more opportunity for gains when the next bull market hits.

Summary: Hedgey’s peer to peer long dated covered call options are an effective tool to build stablecoin runway in a bear market. Buyers should have the appetite to take advantage of depressed token prices, and purchasing covered calls gives them an even higher upside profit potential. DAOs can utilize the covered calls to generate some runway up front, and responsibly let the community buy tokens at given price points above current market prices (ie no dumping).

If you are interested as a DAO or community, but need help in understanding how to price the covered calls reasonably and fairly, please join our discord and reach out to @iceman (or @icemanparachute on telegram).

Disclaimer: This the articles and materials on this site are not intended to provide, and should not be relied on for, financial advise or legal or tax advice, or investment recommendations. There is no consideration given to the specific investment needs, objectives or tolerances of any recipients. Recipients should consult their advisors before making any investment decision. This information is not intended to and does not relate to any specific investment strategy. Investments and Options involve risk, and in volatile market conditions significant variations in the value or return on that investment may occur, including the risk of a complete loss of the investment. Nothing contained herein shall constitute any representation or warranty as to future performance of any digital asset, financial instrument, credit, currency rate, or other market or economic measure. Due to various risks and uncertainties, events and results may differ materially from those reflected or contemplated in the materials. By accepting the information contained in the materials the recipient agrees and acknowledges that no duty is owed to the recipient by Hedgey. The recipient expressly waives any claims arising out of the delivery of the information or the recipient’s use or reliance of the information.

Subscribe to Hedgey
Receive the latest updates directly to your inbox.
This entry has been permanently stored onchain and signed by its creator.