Stake & Cover Pool
Writing options in Hegic
Last updated
Writing options in Hegic
Last updated
Stake & Cover (S&C) is a liquidity provision and utilization model used on Hegic after the Hegic Herge protocol upgrade (October, 2022). There is no division into liquidity providers and stakers / premiums and settlement fees on Hegic. Instead of many different liquidity pools and staking contracts, there is only one Hegic Stake & Cover pool. Staked $HEGIC tokens are utilized to cover the protocol’s net losses on selling options/strategies and earn net profits on all expired options/strategies.
With Stake & Cover, token holders can provide the HEGIC tokens into the pool that will be used for collateralizing options and option strategies acquired through the protocol. The Hegic Stake & Cover (S&C) Pool participants receive 100% of net premiums earned on selling ATM & OTM options (both ETH and WBTC calls & puts) and options strategies (all of them) on Hegic. The net premiums earned (or losses accrued) are distributed pro-rata among all of the Hegic S&C Pool participants.
The net premium is a difference between the total premiums received from all options/strategies buyers and the total profits paid out to options/strategies holders who exercised their contracts in-the-money.
The accumulation of P&L is conducted during a set period called an Epoch.
If at the end of an Epoch the P&L is positive, 100% of it then distributed among the Stake & Cover pool participants in USDC with regards to their shares in the S&C (pro rata distribution).
If at the end of an Epoch the P&L is negative, then a pro rata share of HEGIC tokens from S&C will be converted into USDC for covering the net negative difference.
The conversion rate is publicly announced five days in advance before a new Epoch starts. The initial USDC liquidity for converting HEGIC into for covering the potential negative P&L will be provided by the Hegic Development Fund.
If you were participating with HEGIC tokens in Stake & Cover during the Epoch that had positive P&L accrued, you will be able to claim your share of USDC at any moment after the end of the Epoch.
This share of P&L in USDC is linked to your address and won’t be utilized in the next Epochs. If the following Epoch(s) will result in negative P&L accrued, it will be covered by your share of HEGIC tokens allocated in Stake & Cover, not by the unclaimed USDC balance.
The protocol is using experimental token price monitoring mechanics that are used for setting the conversion rate based on the token price performance during the previous Epoch.
If you don’t agree to participate in the S&C Epoch with a set HEGIC/USDC conversion rate, you can request to not participate in the following Epoch and HEGIC tokens will be sent to your address at the end of the current Epoch. Otherwise, your HEGIC will be automatically utilized in the following Epoch.
There are risk management measures in place that are directly to connected to how much options can be sold in regards to amount of $HEGIC staked in S&C pool, and how much of each type can be sold - amount of available bullish/bearish options, and low/high volatility options should always be in balance.
Until the liquidity of $HEGIC token on numerous DEX protocols and CEX exchanges is deeper and more dense, the collected $HEGIC tokens from negative Epochs will be sold directly to Hegic Development Fund for a fixed price stated at the begging of Epoch. This way HDF is protecting the market price of $HEGIC, as it's basically conducting a OTC sale with the Treasury.
The total duration of an Epoch is 30 days. After the end of one Epoch, the next begins immediately.
HEGIC tokens can be allocated in Stake & Cover only in the first 7 days of every Epoch. The HEGIC/USDC conversion rate for the next Epoch is decided on 25th day of the ongoing Epoch.
A request for withdrawing HEGIC tokens from Stake & Cover can be sent at any moment during the Epoch. The withdrawal will be automatically conducted at the end of an Epoch.
You can find and monitor the current P&L of the operational pool in real-time on the Stake & Cover page of the website.
This metric might be changing during the whole period of an Epoch as new options and option strategies will expire or will be exercised by the users. The final P&L (positive or negative) for settlement is automatically set at the moment of an Epoch’s end.
You can follow and verify the P&L numbers independently following the operational pool’s on-chain balance.
You can find the historical data on P&L behind Stake & Cover previous Epochs looking at the graph on the Stake & Cover page of the website. Note that past performance is no guarantee of future results.
Let's assume that at the begging of the Epoch, fixed $Hegic price is 0.02$, user BigOptionPlaya staked 500,000 $Hegic tokens (10.000 USD worth), and total amount of staked $hegic for that Epoch was 100,000,000 (1 million USD worth).
Postive PnL example:
Total revenue from selling options was 500.000 USDC
Profits that were payed out to option buyers who exercised their options in-the-money was 300.000 USDC
That means Net Premium of the Epoch was 200.000 USDC
Profit per $Hegic token therefore is equal to Net Premium/Amount of staked $Hegic, or in our example 200000/100000000 = 0,002$ per $Hegic
User BigOptionPlaya profit is equal to his amount of staked $Hegic * Profit per $Hegic, or in our example 500000 * 0,002$ = 1000$
As users $Hegic stack was worth 10.000$ at the time of staking, his profit during a 30 day Epoch was exactly 10%, or if we convert it into a APR, its results in a 120% APR
Negative PnL example:
Total revenue from selling options was 500.000 USDC
Profits that were payed out to option buyers who exercised their options in-the-money was 600.000 USDC
That means Net Premium of the Epoch was negative 100.000 USDC, so Epoch ended in a Net loss of 100.000 USDC
Loss per $Hegic token therefore is equal to Net Loss/Amount of staked $Hegic, or in our example 100000/100000000 = 0,001$ per $Hegic
User BigOptionPlaya loss is equal to his amount of staked $Hegic * loss per $Hegic, or in our example 500000 * 0,001$ = 500$
As fixed $Hegic price before Epoch started was 0.02$, the amount of $Hegic the user will lose is equal to 500$/0,02$ = 25000 $Hegic tokens
User's stack at the end of the epoch will be lowered by 25.000 tokens, so he will have 475.000 $Hegic tokens, therefore his loss is 5% of his $Hegic tokens.
