Case Study: Protecting your unvested tokens from price decline with put options
12 NOV 2023 | VIEWS | 3 MIN READ
In the current market environment, safeguarding investments becomes a critical concern for all investors, especially for many token holders, who often face extended lockup periods, limiting their ability to sell their tokens.
In this case study, we’ll explore how Wintermute Asia helped an investor with a substantial amount of locked tokens to hedge his holdings against potential price declines.
The challenge of preserving token value in a volatile market environment
A token holder of 1 million tokens with a remaining three-month lock-up period, was concerned that the current negative economic outlook might hurt the price of his tokens by the time they vest. Furthermore, the unpredictability of how the market would respond to such a significant token unlock event, added complexity to any forecasts regarding the token’s future value. For example, a price decrease from $1 to $0.5, would imply a loss of the token value of $500k.
How covered put options can hedge token value
To address this situation, we helped the token holder protect his investment using put options. This strategy functions much like insurance for his tokens, if the price of the token falls below a certain level, he would have the right to sell it at that higher price and protect his assets.
In early June 2023, the price of the token was $1. In this situation, we facilitated the purchase of token put options at $0.8, which was 20% lower than the current price, for a premium cost of $50,000, equivalent to 5% of the current value of his tokens.
Wintermute Asia’s wide token coverage, no fees & direct access to major Options liquidity sources, and capital-efficient margin framework, were essential in delivering a personalized and cost-effective solution to protect the investor’s assets during the lockup period.
Results: Token’s value remained secure, regardless of price fluctuations
Scenario 1: Tokens were protected when price declined
In September 2023, when the lock-up period ended, the token’s value had fallen from $1 to $0.5, well below the $0.8 strike price. The token holder exercised his option to sell, enabling him to cap his loss at $250,000, 25% under the initial value of the tokens
- Tokens Value at Initial Price = $1 x 1 million tokens = $1 million
- Tokens Value at Expiry = $0.5 x 1 million tokens = $0.5 million
- Option Value = ($0.8 – $0.5) x 1 million tokens = $0.3 million
- Total P&L = $0.5 million (Value at Expiry) + $0.3 million (Option Value) – $1 million (Value at Initial Price) – $50,000 (Premium) = -$250,000 (-25%)
Scenario 2: if Prices had gone up, would have retained upside potential
In the hypothetical case that prices had risen, let’s say from $1 to $1.5, the token holder would have not exercised the option to sell at $0.8. By holding his investment, he would have experienced a substantial increase in value, securing a 45% profit on the initial token’s value. This approach would allow the token holder to benefit from potential value upticks at a minimal cost of 5% of the initial investment.
- Tokens Value at Initial Price = $1 x 1 million tokens = $1 million
- Tokens Value at Expiry = $1.5 x 1 million tokens = $1.5 million
- Total P&L = $1.5 million (Value at Expiry) – $1 million (Value at Initial Price) – $50,000 (Premium) = $450,000
Key Takeaways
- The purchase of put options offered a versatile tool for the investor to shield his locked token holdings from potential price declines.
- This approach balanced the protection of the investment during market turbulence with the potential for gains in case of price increases.
—
This material is provided by Wintermute Asia solely for informational purposes, and is intended only for sophisticated, institutional investors. Specifically, derivatives trading with Wintermute Asia is not suitable for retail persons in the United Kingdom. Trading and investing in digital assets and derivative transactions involve significant risks including price volatility and illiquidity and may not be suitable for all investors. Wintermute Asia is not liable whatsoever for any direct or consequential loss arising from the use of this material. This material does not constitute an offer or commitment, a solicitation of an offer, or commitment, or any advice or recommendation, to enter into or conclude any transactions, or to provide investment services in any state or country where such an offer or solicitation or provision would be illegal.
Wintermute Asia does not give any representations or warranties in relation to the accuracy, validity or complicity of the information of this material, including without limitation the factual information obtained from publicly available sources considered by Wintermute Asia to be reliable; and do not accept any liability for any consequences of using the information contained in this material, and for the applicability of this material for the specific purposes and objectives of this material recipients. Any opinions or estimates expressed herein reflect a judgment made by the author(s) as of the date of publication, and are subject to change without notice. Neither this material nor any copy thereof may be taken, reproduced, or redistributed, directly or indirectly, without prior written permission of Wintermute Asia.