Put Options to hedge liquidation risk?

Unsure whether or not this has previously been discussed but has selling put options through Maker and in partnership with a decentralized options provider as a way to ‘insure’ or ‘protect’ against CDP liquidation risk been brought up?

For example. Let’s say I take a CDP here at a $400 ETH price and a 200% collateralization ratio.

Perhaps through the same dashboard you could offer a 4 week ETH put option (or less if I only want the ETH for a week) with a $380 strike to protect my CDP?

In the back end it could buy the option through Hegic (customizable strike and 1 day, 1/2/3/4 week durations). Hegic liquidity pool also means instant execution at depth with no need to sit in order books.

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Yes this is a very good idea.

The risk premium of the vault type then become the creditworthiness of the writer of the option. In the case there is a central clearinghouse the oracles would provide a feed of the likelihood of the entire default of the platform.


I like the idea. the question is would I pay 4% to stop worrying about the price of ETH? I think so. But it should be easy. I don’t want to have a 4 week protection. It should roll over every 2 weeks for 4 weeks maturity? But then, what happens if the volatility of ETH increase and therefore the put price?

This sounds good but are you aware of a decentralised (put) option provider?

In any case, currently the Col. Ratio (e.g., 150% for ETH) should provide enough ‘insurance’ except on catastrophic events. Setting the Col. Ratio properly is the job of the Risk Team(s).

On the one hand, buying a Put Option might severely reduce the gains of MakerDAO.

On the other hand, with Put Options we might significantly reduce the Col. Ratio because we are insured anyways if the price falls below certain limits. And this might attract more users.

I guess it all depends on what decentralised option providers are available, how their products concretely work and their inherent risk.

EDIT: put options on stablecoins would be extremely useful (much more than for ETH), since the Col. Ratio for them is 101% and this makes MakerDAO extremely exposed to the failure of any of the supported stablecoins).

Opyn provides put options and is decentralized.

I think the OP was more for end-user’s sake than the protocol.

There could be a vault type that accepts both a collateral and a put option and lowers the CR based on the position delta. But it seems complex and I am not sure if it would get much use.

Yeah this is the underlying question for me. I think re the rolling design/costs, the way I envision it is that there should be a simple user interface located at the point you create and manage the CDP, this way you don’t need to go to another site, connect with your wallet, etc. You simply create the CDP and there is an ‘insurance option’ with an associated cost on it.

I would suggest Hegic since it has the flexibility and the liquidity to make something like this work (for ETH). Opyn is another provider but has a lot less liquidity and more limited option contract specifications.

buying a Put Option might severely reduce the gains of MakerDAO

Yes they might, but I wonder if there is an appetite from those that wish to also reduce their CR/risk profile. By collateralizing an option, you can potentially also avoid liquidation risk altogether (since the value of the insurance will increase and cover downside on the underlying)

put options on stablecoins would be extremely useful

Interesting thought, but unaware if these exist anywhere…