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Covered Call Strategy

Covered Call DeFi Option Vaults are one of the early strategies to be released on Spin allowing investors to earn premiums and extract returns from underlying asset price changes.

Quick Overview

Users add liquidity to the Vault by investing in an Underlying Asset (UA) and depositing funds in the Vault. These funds are used as collateral for selling OTM call options to auction winners.
  1. 1.
    Investors deposit WNEAR (Wrapped NEAR) to the Vault and receive vtNEAR (Vault NEAR tokens) representing investors’ share in the Vault.
  2. 2.
    Option buyers deposit WNEAR to the auction.
  3. 3.
    When the auction takes place, bidders bid on the price of the NEAR call options. Depending on the final price, they receive the remaining money back after the auction.
  4. 4.
    The Vault sends options to the auction winners.
  5. 5.
    The WNEAR premium received from auction participants is distributed to the vault. These funds are the income of investors.
If the price of the asset at expiration is lower than or equal to the strike price, vault investors receive all the profit, which means that the options are expired OTM.
If the price of the asset at expiration is higher than the strike price, option buyers can exercise the option and the Vault will lose some of the assets. The higher the expiration price compared to the strike price the more assets are lost by Vault investors. BUT (!) in the event of a price increase, investors cannot lose in dollar terms, it's only the underlying asset amount that decreases. In this case, the options are expired ITM.