What are Structured Products?

Structured products are pre-packaged financial instruments with predefined features that offer returns based on an underlying asset and are often linked to derivatives.

Structured products can take many forms and provide great flexibility in formulating investment strategies, from simple to complex. Counterparty risk, underlying asset liquidity, hedging applications by liquidity providers, and macroeconomics play roles in proper risk management, which defines a framework for creating the investment objectives.

These could be tailor-made to individual investors or groups of individuals who share a common investment objective or asset and, by nature, are usually not traded on traditional exchanges, given their inherent flexibility.

AlgoRai offers these structured products in the form of option vaults that generate yield for its users through automated option writing strategies. Current AlgoRai vaults are offered on native Algo, as well as wrapped BTC and ETH, and generate yield for users by writing (selling) covered calls and put options on the underlying vault assets.

Our Option Writing Strategies

There are 2 main strategies that AlgoRai vaults employ:

1. Writing covered calls - The vaults sell “out of the money covered calls”, call options with a strike price above the prevailing spot market price of the underlying asset held (Algo or goBTC and goETH in the case of wrapped coins). This strategy receives premiums paid in the underlying asset. Hence the vault depositor’s holdings of the native support over time grow. If the spot market price of the underlying asset exceeds the strike price or is “in the money” at the end of the round, an amount equal to the difference between the settlement and strike price will be withdrawn and paid to the market makers.

2. Writing puts - The vaults sell “out of the money” put options with a strike price below the prevailing spot market price on an asset, i.e., Algo, BTC or ETH, with the underlying USDC deposits. This strategy receives premiums paid in USDC. Hence the vault depositor’s holdings of the stable coin over time grow. If the spot market price of the reference asset is below the strike price or is “in the money” at the end of the round, an amount equal to the difference between the settlement and strike price will be withdrawn and paid to the market makers.

These yield focused strategies collect premiums on weekly written options and reinvest the premiums into the vaults, effectively compounding the yield.