Crab Strategy of Opyn Generates 14% Return

With Opyn’s Crab strategy, investors who don’t know much about options can make money in a flat market with just one click. But there are risks involved.

A decentralized finance (DeFi) product that came out earlier this year to help investors make money in a market that was going nowhere is giving the results that were hoped for.

The best DeFi options platform made the “Crab” strategy, Opyn, to make money when the price of ether (ETH) isn’t moving around much. Since its v2 went live in late July, it has made 14% in U.S. dollars and 42% in ether. Since the end of July, the price of Ether has dropped 20%. However, in the last four weeks, the cryptocurrency has traded chiefly between $1,100 and $1,300.
The strategy is just one more way that the DeFi industry helps investors avoid the complexities of traditional option strategies like “short straddle,” which are often set up by experienced traders when the market is quiet.

When a trader does a short straddle, he or she sells call and put options contracts on a centralized exchange. The short straddle makes money if the market stays in a narrow range. Setting up these kinds of multi-leg strategies isn’t as easy as it sounds, because traders have to choose the right levels to buy or sell options, as well as the expiration date, and actively manage the position, because there are a lot of things that affect the price of options.

In Opyn’s crab strategy, users only need to put up ETH as collateral to start making money from a sleeping market. A lot of money seems to be going into the automated product from investors.

“The strategy had 888 ETH when Crab v2 went live. The strategy now has 5,378 ETH, which is a 505% rise in 3 months ” Opyn’s head of marketing and community is Wade Prospere.

How a crab works inside

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The crab strategy is built on top of Opyn’s Squeeth or squared ether, which is an index that tracks the price change of ether to the power of two and lets buyers earn more when the market goes up and lose less when the price goes down in exchange for high funding rates, which are the costs of keeping an open “power perpetual position.”
After a user puts up ETH as collateral, the crab vault combines a long (bullish) position in ETH with a short (bearish) position in Squeeth to make a market-neutral position.

This lets crab depositors get the funding rate paid by Squeeth buyers, which is the cost of holding long positions, without having to worry about ETH and Squeeth prices going up. Because the payoff is so good, the funding rate that buyers pay is higher than what they pay in a standard perpetual futures market and in a long position with 2x leverage.
The vault is mostly a short Squeeth with a hedge around it.

“With the crab strategy, users can make money (yield) by shorting Squeeth, whether ETH goes up or down. In other words, Crab v2 is a market-neutral strategy “Prospere said.

Every Monday, Wednesday, and Friday at 16:30 Coordinated Universal Time, the strategy is rebalanced so that it stays in a market-neutral position.

“If the price of ETH goes down, the strategy sells Squeeth tokens for ETH,” Prospere said. “This means it buys more ETH to keep the market neutral.” So, the crab stores ether when the market is down. If ETH doesn’t go up or down by X% between rebalances, depositors get their money back. The percentage depends on how much money the Squeeth buyers give, which changes daily.

At the time of publication, the crab strategy said it would pay out if the price of ether didn’t change by more than 4.22 percent between rebalancing periods. Even though the “one-click” strategy to make money from a possible merger may seem appealing to small investors, it is not risk-free. As with short straddle, people who put money into crab stand lose money if the price of ether goes up or down quickly.

The payoff diagram shows that the crab strategy works best when the price of ether is relatively stable and the market is moving sideways.

“If ETH moves more than a certain amount [percentage] that is based on the funding received from the short Squeeth position, the strategy is not profitable on that day,” Prospere wrote in an official explanation.

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“If the Crab Strategy falls below the safe collateralization threshold (150%), the strategy could be liquidated,” Prospere said.

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