Bullish accumulation
Accumulating long-term holdings in a bullish market environment
Last updated
Accumulating long-term holdings in a bullish market environment
Last updated
Bob owns 100 ETH and wants to accumulate more of it. Lending out ETH for a month is not an option as it only yields 0.01%. Bob is willing to accept some small risk of losing his ETH in exchange for a higher yield. His conservative estimate is that ETH/USD will be above $2'000 in a month. The current ETH price is $3,500.
Alice is bearish on ETH/USD and believes that the price will be below $2'000 in a month. She would like to benefit when the price goes down.
Bob uses the DIVA App to create a long position that is going to return his deposited collateral when ETH/USD stays above $2'000. Bob's yield comes from selling the short position to Alice. An example configuration is provided below:
After creating the pool, Bob sells all 100 short position tokens minted for a total of WETH 3 to Alice and keeps the long position tokens. The payoff profiles for Alice and Bob are depicted below:
1) ETH/USD >= $2'000:
Bob can redeem his collateral of 100 WETH and keep the premium of 3 WETH from selling the short position tokens to Alice -> net gain for Bob: WETH 3 (+3% in a month, +36% in a year). -> net loss for Alice: WETH 3
2) ETH/USD = $1'250:
Bob can redeem WETH 25 of his collateral and keep the premium of 3 WETH -> net loss for Bob: WETH 72 -> net gain for Alice: WETH 72 (24x on her investment)
3) ETH/USD = $800:
Bob received a premium of 3 WETH and loses the initially deposited collateral of WETH 100 -> net loss for Bob: DAI 97 -> net gain for Alice: DAI 97 (32.3x on her investment)
