Payoff scenarios
Leveraged Options Vaults (LOV)
Supercharger 2x Leverage Example Scenarios
Scenarios Quick Link:
Scenario 1 - Normal expiry, closing spot above 100%
Scenario 2 - Normal expiry, closing spot below 100%
Scenario 4 - Knock-in event, closing spot above KI
For each scenario below, assume the following:
$1000 initial investment
User trades the LOV vault, Supercharger at 2x leverage
27 day investment duration
Underlying assets in basket = BTC, ETH
Knock-in (KI) barrier level is 70% meaning deposits are protected against drops of up to 30%
APY = 41%
Note: this APY is equivalent to an APR = 36% (ignores compounding from vault rollover)
Yield per 27 days (one vault lifecycle)
= 36% APR / 365 days per year * 27 days of total yield accrual in vault
= 2.66% yield
*Note: APY/APR does not scale linearly with leverage levels, for more information please see the Appendix
Scenario 1 - Normal expiry, closing spot above 100%
Assume that the following happens:
BTC prices ended 1% higher than when the vault started, closing at 101% of initial spot price
ETH prices ended 10% higher than when the vault started, closing at 110% of initial spot price
None of the assets fell below the Knock-in (KI) Barrier at 70% at any time during the 27 days
What happens to the investor in this example scenario?
There was no knock-in event (because no asset fell below the KI barrier at any point in the 27 days). Therefore the LOV reaches its full 27 day duration and expires as normal. Thus, the full principal that was deposited by the user is unaffected (and in the case if a user withdrew, 100% of their principal deposited would be returned to them).
What is the payoff for the investor?
Principal = $1000
Yield earned = $1000 * 2.66% yield per vault = $26.6 yield
Total payoff = $1026.6 after 27 days
ROI = $1026.6/$1000 = +2.66% in 27 days
Scenario 2 - Normal expiry, closing spot below 100%
Assume that the following happens:
Markets are shaken and prices drop
After 27 days, BTC ends down 23%, closing at 77% of initial spot price when vaults started trading
After 27 days, ETH ends down 13%, closing at 87% of initial spot price when vaults started trading
However none of the assets fell below the Knock-in (KI) Barrier at 70% at any time during the 27 days
What happens in this example scenario?
There was no knock-in event (because no asset fell below the KI barrier at any point in the 27 days). Therefore the LOV reaches its full 27 day duration and expires as normal. Thus, the full principal that was deposited by the user is unaffected (and in the case if a user withdrew, 100% of their principal deposited would be returned to them).
What is the payoff for the investor?
Principal = $1000
Yield earned = $1000 * 2.66% yield per vault = $26.6 yield
Total payoff = $1026.6 after 27 days
ROI = $1026.6/$1000 = +2.66% in 27 days
In this scenario, the power and benefit of knock-in barriers is visible. Investors continue to accrue daily yield despite the negative performance of both BTC and ETH. There is no impact to the investor's deposited principal upon completion of 27 days.
Scenario 3 - Knock-in event
Assume that the following happens:
During the 27 day life of the vault, we see that on Feb 10, BTC (yellow line) has fallen to 65% of initial trading spot price. This is below the 70% KI barrier which means that the vault has experienced a knock-in event. Therefore when the vault reaches maturity and expires after 27 days, the user’s deposited principal will experience some loss.
On Feb 27 when the vault expires, we see that:
BTC prices (yellow line) have not recovered since the knock-in event and its final trading level is 59% of day 1 spot, meaning it’s down 41%
ETH prices (blue line) have recovered since the knock-in event and its final trading level is 77% of day 1 spot, meaning it’s down 23%
The worst performing of the two assets is BTC (down 41%) which means that the user’s deposited principal takes a loss equal to -41%
Note: when a vault knocks in, which in this example happens on Feb 10, there is no impact to the vault such as causing it to end the trade or expire early. Knock-in events do not cause changes to the timing of the vault lifecycle. They mark the vault as having been knocked-in which causes the principal returned upon expiry to use the knock-in formula where there is some loss of principal.
What is the payoff for the investor?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
Upon expiry, we see that BTC is the worst performing asset, down -41% while ETH is only down -23%. Thus:
Principal
Starting amount = $1000
Loss due to knock-in and leverage = $1000 * -41% BTC worst performer * 2x leverage = -$820
Note: Loss cannot exceed starting amount, so the amount is constrained to a max of -$1,000
Ending amount = $1000 - $820 = $180
Yield earned = $1000 * 2.66% yield per vault = $26.6
Total payoff = $180 + $26.6 = $206.6 after 27 days
ROI = $206.6/$1000 = -79.3% return
Scenario 4 - Knock-in event, closing spot above KI
Assume that the following happens:
During the 27 day life of the vault, we see that on Feb 10, BTC (yellow line) has fallen to 65% of initial trading spot price. This is below the 70% KI barrier which means that the vault has experienced a knock-in event. Therefore when the vault reaches maturity and expires after 27 days, the user’s deposited principal will experience some loss.
On Feb 27 when the vault expires, we see that:
BTC prices (yellow line) have recovered since the knock-in event and its final trading level is 87% of day 1 spot, meaning it’s down 13%
ETH prices (blue line) have recovered since the knock-in event and its final trading level is 89% of day 1 spot, meaning it’s down 11%
The worst performing of the two assets is BTC (down 13%) which means that the user’s deposited principal takes a loss equal to -13%
Note: when a vault knocks in, which in this example happens on Feb 10, there is no impact to the vault such as causing it to end the trade or expire early. Knock-in events do not cause changes to the timing of the vault lifecycle. They mark the vault as having been knocked-in which causes the principal returned upon expiry to use the knock-in formula where there is some loss of principal.
What is the payoff for the investor?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
Upon expiry, we see that BTC is the worst performing asset, down -13% vs. ETH which is down -11%. Thus:
Principal
Starting amount = $1000
Loss due to knock-in and leverage = $1000 * -13% BTC worst performer * 2x leverage = -$260
Note: Loss cannot exceed starting amount, so the amount is constrained to a max of -$1,000
Ending amount = $1000 - $260 = $740
Yield earned = $1000 * 2.66% yield per vault = $26.6
Total payoff = $740 + $26.6 = $766.6 after 27 days
ROI = $766.6/$1000 = -23.3% return
Insanic 5x Leverage Example Scenarios
Quick links below:
Scenario 1 - Normal expiry, closing spot above 100%
Scenario 2 - Normal expiry, closing spot below 100%
Scenario 4 - Knock-in event, closing spot above KI
For each scenario below, assume the following:
$1000 initial investment
User trades the LOV vault, Supercharger at 2x leverage
27 day investment duration
Underlying assets in basket = ETH, SOL, AVAX
Knock-in (KI) barrier level is 70% meaning deposits are protected against drops of up to 30%
APY = 40%
Note: this APY is equivalent to an APR = 35% (ignores compounding from vault rollover)
Yield per 27 days (one vault lifecycle)
= 35% APR / 365 days per year * 27 days of total yield accrual in vault
= 2.59% yield
*Note: APY/APR does not scale linearly with leverage levels, for more information please see the Appendix
Scenario 1 - Normal expiry, closing spot above 100%
Assume that the following happens:
SOL prices ended 1% higher than when the vault started, closing at 101% of initial spot price
ETH prices ended 10% higher than when the vault started, closing at 110% of initial spot price
AVAX prices ended 2% higher than when the vault started, closing at 102% of initial spot price
None of the assets fell below the Knock-in (KI) Barrier at 50% at any time during the 27 days
What happens to the investor in this example scenario?
There was no knock-in event (because no asset fell below the KI barrier at any point in the 27 days). Therefore the LOV reaches its full 27 day duration and expires as normal. Thus, the full principal that was deposited by the user is unaffected (and in the case if a user withdrew, 100% of their principal deposited would be returned to them).
What is the payoff for the investor?
Principal = $1000
Yield earned = $1000 * 2.59% yield per vault = $25.9 yield
Total payoff = $1025.9 after 27 days
ROI = $1025.9/$1000 = +2.59% after 27 days
Scenario 2 - Normal expiry, closing spot below 100%
Assume that the following happens:
Markets are shaken and prices drop
SOL prices tank down 20% vs. when the vault started, closing at 80% of initial spot price
ETH prices tank down 7% vs. when the vault started, closing at 93% of initial spot price
AVAX prices tank down 13% vs. when the vault started, closing at 87% of initial spot price
None of the assets fell below the Knock-in (KI) Barrier at 50% at any time during the 27 days
What happens in this example scenario?
There was no knock-in event (because no asset fell below the KI barrier at any point in the 27 days). Therefore the LOV reaches its full 27 day duration and expires as normal. Thus, the full principal that was deposited by the user is unaffected (and in the case if a user withdrew, 100% of their principal deposited would be returned to them).
What is the payoff for the investor?
Principal = $1000
Yield earned = $1000 * 2.59% yield per vault = $25.9 yield
Total payoff = $1025.9 after 27 days
ROI = $1025.9/$1000 = +2.59% after 27 days
Scenario 3 - Knock-in event
Assume that the following happens:
During the 27 day life of the vault, we see that on Feb 13, SOL (green line) has fallen to 43% of initial trading spot price. This is below the 50% KI barrier which means that the vault has experienced a knock-in event. Therefore when the vault reaches maturity and expires after 27 days, the user’s deposited principal will experience some loss.
On Feb 27 when the vault expires, we see that:
SOL prices (green line) have not recovered since the knock-in event and its final trading level is 44% of day 1 spot, meaning it’s down 56%
ETH prices (blue line) have recovered since the knock-in event and its final trading level is 59% of day 1 spot, meaning it’s down 41%
AVAX prices (pink line) have not recovered since the knock-in event and its final trading level is 33% of day 1 spot, meaning it’s down 67%
The worst performing of the three assets is AVAX (down 67%) which means that the user’s deposited principal takes a loss equal to -67%
Note: when a vault knocks in, which in this example happens on Feb 13, there is no impact to the vault such as causing it to end the trade or expire early. Knock-in events do not cause changes to the timing of the vault lifecycle. They mark the vault as having been knocked-in which causes the principal returned upon expiry to use the knock-in formula where there is some loss of principal.
What is the payoff for the investor?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
Upon expiry, we see that AVAX is the worst performing asset, down -67% vs. ETH which is down -41% and SOL which is down -56%. Thus:
Principal
Starting amount = $1000
Loss due to knock-in and leverage = $1000 * -67% AVAX worst performer * 5x leverage = -$3,350 → -$1,000 (see note below)
Note: Loss cannot exceed starting amount, so the amount is constrained to a max of -$1,000
Ending amount = $1000 - $1000 = $0
Yield earned = $1000 * 2.59% yield per vault = $25.9
Total payoff = $0 + $25.9 = $25.9 after 27 days
ROI = $25.9/$1000 = -97.4% return
Note: As you can see in the calculation above, users cannot lose more principal than what they deposited when calculating the loss of principal magnified by leverage.
Scenario 4 - Knock-in event, closing spot above KI
Assume that the following happens:
During the 27 day life of the vault, we see that on Feb 13, SOL (green line) has fallen to 43% of initial trading spot price. This is below the 50% KI barrier which means that the vault has experienced a knock-in event. Therefore when the vault reaches maturity and expires after 27 days, the user’s deposited principal will experience some loss.
On Feb 27 when the vault expires, we see that:
SOL prices (green line) have recovered since the knock-in event and its final trading level is 85% of day 1 spot, meaning it’s down 15%
ETH prices (blue line) have recovered since the knock-in event and its final trading level is 93% of day 1 spot, meaning it’s down 7%
AVAX prices (pink line) have recovered since the knock-in event and its final trading level is 77% of day 1 spot, meaning it’s down 23%
The worst performing of the three assets is AVAX (down 23%) which means that the user’s deposited principal takes a loss equal to -23%
Note: when a vault knocks in, which in this example happens on Feb 13, there is no impact to the vault such as causing it to end the trade or expire early. Knock-in events do not cause changes to the timing of the vault lifecycle. They mark the vault as having been knocked-in which causes the principal returned upon expiry to use the knock-in formula where there is some loss of principal.
What is the payoff for the investor?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
Upon expiry, we see that AVAX is the worst performing asset, down -23% vs. ETH which is down -7% and SOL which is down -15%. Thus:
Principal
Starting amount = $1000
Loss due to knock-in and leverage = $1000 * -23% AVAX worst performer * 5x leverage = -$1,150 → -$1,000 (see note below)
Note: Loss cannot exceed starting amount, so the amount is constrained to a max of -$1,000
Ending amount = $1000 - $1000 = $0
Yield earned = $1000 * 2.59% yield per vault = $25.9
Total payoff = $0 + $25.9 = $25.9 after 27 days
ROI = $25.9/$1000 = -97.4% return
Note: As you can see in the calculation above, users cannot lose more principal than what they deposited when calculating the loss of principal magnified by leverage.
Appendix
Why does APY not scale linearly with the leverage?
When users deposit their funds into a, for example, 4x vault, they are essentially allowing their capital to be used to take a leveraged position. However, as the leverage multiplier increases beyond a certain level, the user stands to lose their entire principal if the position goes against them.
For example, with a 50% KI and 2x leverage, the user would lose their entire principal if the price of the asset falls below the liquidation price. As the leverage multiplier increases beyond this point, the gradient of the put line becomes steeper, meaning that the price of the asset would need to increase even more after hitting the liquidation price for the user to recover their losses.
Therefore, the plateau point in APY for a given product is largely driven by the availability of principal vs. the potential loss on KI. Additional increases in APY beyond this point are a function of the ability to recover post KI. If a user has conviction that the price will immediately recover after KI is hit, they may opt to take the highest possible APY and increase their recovery barrier. However, if they are not confident in a recovery scenario, they may opt for a lower leverage multiplier to reduce their potential losses.
Ultimately, a user's decision-making process will depend on how much principal they are willing to risk and how confident they are in the asset's price recovering after KI is hit. It's important for users to understand the risks and potential rewards of different leverage levels before depositing their funds into a vault.
Historical analysis of knock-in probabilities by product
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