Arrow Markets Launches CSOVS on Avalanche

Published on: 22.04.2023
Arrow Markets Launches CSOVS on Avalanche

Arrow Markets Launches CSOVS on Avalanche, the release of its Call Spread Option Vaults (CSOVs) on Avalanche’s C-Chain mainnet. 

Arrow cutting-edge Generalized Options Vault GOV infrastructure is the first to be deployed on the Avalanche platform. This launch is a milestone in options trading technology and a testament to the Avalanche ecosystem, transforming the DeFi derivatives landscape. Arrow Markets Launches CSOVS on Avalanche

The first CSOVs were launched on March 31, 2023, and are presently being tested on a small scale by a small group of volunteers. They will progressively extend the vaults’ capacity during the spring in order to analyze market demand and execute effective security assessments.

What are Call Spread Option Vaults?

Call spread vaults allow users to take either side of a call spread. There are two main workflows, corresponding to the two sides of the call spread.

1 — Liquidity / Short Options

Liquidity providers deposit the underlying at cycle start to fund call spreads. The liquidity providers receive a pro-rata share of the profits and losses of the call credit spreads sold during the course of the vault buy cycle. Liquidity is used to pay buyers if calls expire in the money.

2 — Buyers / Long Options

Buyers can buy call spreads at the prevailing market prices until either the number of available contracts goes to zero or the contracts expire. Spreads that expire in the money get liquidity provider deposits, while those that expire out of the money lose their premiums.

Call spread payoffs

Call credit spreads correspond to the short side, and consist of the following option strategy:

  1. Sell a call option with a certain strike K1
  2. Buy a call option with a higher strike K2 > K1

where both options share the same expiration date.

  • Note this option strategy is also called a bear call spread (see our TradingThursdays thread on it!).
  • The following diagram summarizes the general profit of a call credit spread at expiration:

The liquidity providers are effectively selling call credit spreads, while the buyers are taking the other side, called call debit spreads. The buyers call debit spread option bundle the mirror opposite of the sellers:

  1. Buy a call option with strike K1
  2. Sell a call option with the higher strike K2>K1

Deposit Period and Expirations

The CSOVs currently implemented are long-lived contracts that implement 14-day circuits in perpetuity.

The stages of the circuit are as follows:

  1. An aggregation period where underlying liquidity is deposited (2–3 days)
  2. An execution period where buyers can buy options against the underlying liquidity, with prices powered by Arrow’s SVI (Stochastic Volatility Inspired) Engine (11–12 days)
  3. A settlement step (at expiration), where liabilities and premiums are aggregated and the cycle is rolled over. Depositors can claim premiums, and buyers can claim settlement payments at any time after expiration (0 days)


Strike Selection:

At the start of the execution period, the strikes of the call credit spreads are selected in the following way

  1. The short option strike is selected to be 10% above the spot price of the underlying at that snapshot in time
  2. The long option strike is selected to be 30% above the spot price of the underlying at that time.


More on CSOV’s Capital Efficiency:

CSOVs maximize capital efficiency by exploiting the boundedness of call spread payouts. We define the capital multiplier c = K1/(K1-K2) to be the maximum number of spreads created per unit of underlying liquidity. This allows underlying capital to be more productive than when writing covered calls. For instance, a 10% — 30% OTM spread can back 6.5 spreads, as opposed to only one covered call. Note that taking advantage of this “embedded leverage” comes with heightened risk exposure to your collateral. For example, if the expiration price happens to fall exactly on the higher strike (K2), you will lose all of the collateral deposited.

Over the next week we will be releasing more information in our docs on different ways to use our CSOVs as well as the risks associated with them.

Arrow Generalized Option Vaults (GOVs)

As mentioned before, CSOVs are the first vaults deployed using Arrow’s Generalized Option Vaults (GOV) Infrastructure.

Arrow’s Generalized Option Vault (GOV) infrastructure brings customizable, composable, capital-efficient workflows to options trading on Avalanche. GOVs can be built around any net short option portfolio and in the very near future, we will be rolling out put spread option vaults (PSOVs), Iron Condor Option Vaults (ICOVs) and Butterfly Option Vaults (BOVs).

Arrow’s GOVs are the product of a collaborative effort of exceptional developers, quants, and growth hackers. Arrow’s human capital is their greatest asset.

How to access CSOVs

The initial phase of the mainnet deployment is “guarded.” Vault capacity will be scaled up over time as more users are whitelisted. Addresses will be whitelisted on a weekly basis.

About Arrow Markets

A decentralized options AMM on Avalanche. Allowing anybody to easily contribute liquidity to the protocol in addition to the conventional market makers in exchange for platform income.

Website | Twitter

About Avalanche

Website | Twitter





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