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Volt#03: Crab strategy

Harvest volatility yield in range-bound (
πŸ¦€
) markets!

Start earning @ app.friktion.fi/crab​
This Volt puts on a short Power Perpetual (ELI5 here, deep dive here) position which collects funding rates while hedging directional price risk (delta) with normal (power=1) perpetuals. Volt#03 takes a short position on volatility, not the direction of price move. If you expect a range-bound market and want to generate yield regardless of direction this strategy is a good fit.
This strategy is similar to continuously selling an ATM (at-the-money) straddle to short volatility and collect premiums. The Volt targets a 200% collateralization ratio and is profitable within a Profit Range, the price window where the strategy remains profitable, which can be found on the UI for each asset supported. Outside this range, the strategy is unprofitable.
The Volt rebalances weekly (epoch length = 168 hours) to account for new deposits/withdrawals or during volatility triggers that changes the Volt's desired delta exposure. This is to maintain a market neutral exposure.
Learn more about how Volt #03 works under the hood in the Example section.

Payoff

Volt #03 Payoff Diagram for BTC
Above is what a hypothetical Volt#03 position looks like with a 0.20% daily funding rate. This assumes BTC is trading at $50,000.
The strategy makes the most money when BTC stays at $50,000, realizing 100%+ APY when it does so. This allows users to generate yield in rangebound crab markets.
The longer the user deposits in Volt#03, the wider the profit range becomes.

Funding Rates

Relationship between funding rate and profit range and APY
The most important part of this strategy is the funding rate implied on the Entropy perpetuals exchange. The funding rate is determined by the difference between the midpoint of the exchange and the oracle price.
Higher funding rates means that the market expects high volatility in the future. Power perp buyers are willing to pay Volt#03 extra yield in return for a convex payoff similar to an option.
Higher funding rates means that underlying can move in a higher range before becoming unprofitable for Volt#03 depositor. At the extremes (30 bps a day), the net APY that the Volt depositors earn can be over 200%+ APY.

Key parameters

  • Deposit asset: USDC
  • Epoch duration: 24 hours
  • Target Collateralization Ratio (CR): 200%
    • Safe Collateralization Threshold: 150% (rebalance trigger at this level to avoid liquidation)
  • Rebalance triggers
    • Epoch ends/begins
    • CR < 150%
Net Return Profile, Friktion Volt#03
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Trade volatility and scalp profit from price movements in either direction. This Volt is a structured volatility portfolio built to earn returns that are negatively correlated to the market. Arbitrage differences between implied and realized volatility.
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Useful calculations

AnnualizedImpliedVolatility=1hrfundingrateβˆ—24βˆ—365Annualized Implied Volatility = \sqrt{1hr funding rate * 24 * 365}
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