I’m all hopped up on Friktion lately. They’re moving quickly and releasing at a rapid pace. There’s a lot to cover after my last article where I discussed their Volts (Vaults) for Covered Calls.
What’s the latest?
Friktion released a series of Volts for Cash Secured Puts. Your investable asset is USDC which secures the put against the underlying asset. The volt follows the epochs of existing volts, meaning funds deposited now will be put to work on Friday. It will auto compound rewards every Friday until you trigger your withdrawal (which you can do at any time, and the withdrawal will happen at the end of that epoch).
What is a cash-secured put?
A cash-secured put is where you put up a quoted asset (all of them are USDC on Friktion currently) against an underlying asset. Selling a secured put is anticipating an asset’s market value will stay above a certain price.
What is the strike price for the put?
The strike price is the price at which your USDC will be utilized to purchase the underlying asset. When Friktion applies the funds to the market, they set a Strike price. Prior to the epoch, the strike price is not published. This is to prevent front running the investment strategy. The market is also ever-changing, and not pre-releasing a strike price allows the team to be responsive to market conditions to get the best outcome for the volt.
What is the preferred outcome for a Cash Secured Put?
If the asset’s market value is above the strike price, it is considered out of the money (OTM). In this instance, you keep the premium that the buyer paid to have access to your put. Your investable asset (USDC) is freed. You receive your asset plus the premium back.
What happens if my put is in the money (ITM)?
If the asset dips below the strike price, the buyer of the put may exercise the put and force you/Friktion, the seller, to buy the underlying asset at the strike price. This is called being assigned.
On a typical market put, you may be inclined to hold the underlying asset if you were betting for it to continue to increase in value. On Friktion, however, the rebalancing program will return the asset to market at the end of the epoch and sell it with limited slippage back to USDC, which will be returned to investors of the Volt.
When asked about the function where users get back the quote asset instead of the underlying asset, Community Managers for Friktion have indicated they intend to add Volt functionality eventually that allows investors to get back the underlying asset. This is a win in my books.
If you are assigned, you still get your premium gains.
What risks do I have when investing in a put strategy?
One of the common risks associated with a put strategy is if the put is assigned. Buying an asset at the strike price when the market rate is actually less than the strike place leads to an unrealized profit loss of the difference between the market rate and strike price.
When selling puts directly on the market, you have the opportunity to capture and keep the underlying asset in hopes that it increases in value. On Friktion, the asset is liquidated back to the quoted asset before returning to the volt users. This will cause an unrealized loss if you were bullish on the asset rebounding. Friktion’s algorithm manages risk appropriately to lower the chances of assignment.
What are premiums?
In return for receiving a premium, the seller of a put assumes the obligation to buy the underlying stock at the strike price at any time until the expiration date should the buyer of the put option wish to exercise it. [source]
How are puts different from covered calls?
Covered Calls are when you are selling an asset you already own and are long on. Friktion supports covered calls and I detail it in this blog post.
What about rolling positions or buying to close?
Currently, more advanced responses to being ITM are not available on Friktion. Since investments happen on an epoch schedule and the value between each epoch may vary, the longevity required to execute these responses may make it not possible to implement. Keep an ear open in Friktion’s discord to see if that ends up becoming possible. I have opened it as a feature request.