Premia is a DeFi option protocol operating on Ethereum and Arbitrum. Users can buy options, or deposit into a pool, which sells them.
How Premia works
Premia runs a peer-to-pool market-making model. This means that when you purchase an option on Premia, it is sold to you by the pool. This pool is a DeFi Option Vault (DOV), which other users deposit into.
DOVs essentially democratise the process of selling options. Selling options is a complex process requiring specialist knowledge to decide on different metrics. You need to take into account ‘the Greeks’, including delta and gamma, but that is out of the scope of this report. Such strategies are used by market makers and sophisticated traders in TradFi but are reserved almost exclusively for the ultra-rich.
With Premia, users simply provide liquidity to a pool, which removes the requirement to match options sellers and buyers. This allows buyers to have more flexibility on option parameters such as strike price and expiration date. It also enables liquidity providers to earn passive yield without actively writing or managing options on a monthly basis.
This tutorial will go through how to provide liquidity, buy options and stake on Premia.
Tutorial
Connecting your Wallet
Head to https://premia.finance/ and click ‘open app’.
First, you’ll need to connect your wallet.
Premia currently supports the following wallets:
You’ll need to agree to Premia’s disclaimer, unlock your wallet and approve the connection.
We’ll be using MetaMask for this tutorial. You can check out our tutorial for a full guide on how to set up and use MetaMask.
Premia currently supports three different networks – Ethereum, Fantom and Arbitrum. You can switch between these networks by clicking on the arrow in the bottom right of your screen.
Swapping and Bridging Tokens
To make things even more user-friendly, Premia has made it possible to bridge from other networks and exchange tokens directly on the platform.
Bridge Tab
You can easily transfer tokens between the networks that Premia currently supports.
Note that your wallet will need to be set to the network you’re bridging from.
Exchange Tab
Swapping tokens is also very straightforward.
You can swap between any tokens that Premia has liquidity for.
Providing Liquidity
First, make sure you’re on the right network.
In the pool tab, you’ll first need to choose the asset pair you would like to provide liquidity for and then decide whether you want to supply to the call or the put pool.
Covered Calls: sells call options, which give the buyer the right to buy the underlying asset at a set point in the future for a set price (the strike price). The buyer will pay a premium in exchange for this right, this is the profit you receive as a liquidity provider (if all goes well). The assets deposited into the pool are the collateral which covers the risk of selling the option.
Cash-Secured Puts: sells put options, which give the buyer the right to sell the underlying asset at a set point in the future at a set price. Cash is deposited into the pool, ready to buy the asset at the strike price.
Selling options is much more complex than buying them and it’s important to note that if the options the pool is selling (i.e. the options you are selling) expire ‘in-the-money’, it means that the buyer profits, and you (the pool depositor) will lose out.
You can also check out Premia’s analytics page to see the full list of token pairs and search for the top-performing pools/options.
The percentage utilization (the percentage of the pool capital that is locked in options contracts) and the estimated annual rate of return for selling options (in this case 36.11%) will be displayed. Liquidity providers also earn PREMIA – the protocol’s native token, which is reflected by the ‘liquidity mining rate’ (in this case 7.76%).
Towards the bottom of the screen, you’ll see a graphic depicting the pool price level.
Without getting too technical, the higher the price level is above market, the greater the utilization in relation to the supply. This means buyers will pay higher premiums for options contracts, and you, the liquidity provider, will earn more.
Click ‘add’ to proceed.
Enter in the amount you want to add or click ‘max’ to deposit the total amount in your wallet. Premia allows you to deposit with any asset that the protocol has liquidity for. The protocol will swap these assets for you when you deposit to the pool.
Premia charges liquidity providers a 2.5% annualized utilization fee, which means when your funds are locked and you are earning yield, you get charged 2.5% APR (so just over 0.2% per month).
The ‘Market make for additional rewards’ feature is enabled by default. This essentially means that the buyer can sell the option back to the pool before expiration. For the seller, it means that capital can be released sooner but also adds an unknown as only the option buyer can choose to sell it back.
If this is your first time using Premia, you will need to approve spending first and then confirm the purchasing transaction.
Once the transaction is finalized, your liquidity position should be visible in the ‘positions’ tab.
Note that your liquidity will be locked for a minimum of 24 hours.
Buying Options
First, make sure you are set to the network that you want to use.
In the options tab, select the token you want to buy options for and whether you want to buy a call or a put option.
Again, you can check out Premia’s analytics page to see the full list of token pairs and search for the top-performing pools/options.
Everything else, such as the expiration date and strike price, can be set manually (by clicking ‘custom’) or by selecting one of the already available options.
Once you enter this information, as well as the option size (i.e. amount), the total cost (i.e. premium) of the contract will be automatically calculated. Premia charges a 3% fee on all options.
Note that the ‘breakeven price’ is quantified in terms of the underlying asset (in this case DAI, which is a stablecoin) that Premia uses to trade the option.
Similar to the pool tab, you have the pool price level charts.
When the price is ‘below market’, it means that there is high supply in the pool and less utilization, so the price of the options contract will be cheaper compared to competitors.
Once you’re happy, click ‘buy option’. Premia allows you to purchase options with any asset that the protocol has liquidity for. These assets will be swapped for you when you purchase the option.
If this is your first time using Premia, you’ll need to approve spending first and then confirm the transaction in your wallet.
Once the transaction is finalised, the contract should be visible in the ‘positions’ tab.
All options on Premia are fully collateralized, meaning the underwriter’s (liquidity provider’s) tokens are locked in the option from the time of purchase until settlement. All options are settled 24 hours after expiry.
Note: option buyers will lose out when the option expires out of the money. This essentially means that the option won’t be worth exercising, so the loss will be in the form of the premium paid to purchase the option. In this case, the depositor into the pool earns the premium.
Staking PREMIA
At the moment, staking is only available on Ethereum. If you don’t own any PREMIA, you can use the swap tab to exchange, or you can buy it on exchanges such as Uniswap and Sushiswap.
In the staking tab, enter the amount of PREMIA you would like to stake or click ‘max’ to stake your total balance.
You will first need to approve spending and then approve the staking transaction in your wallet.
80% of all protocol fees are converted to PREMIA, which are then distributed to PREMIA stakers.
Positions Tab
All of your active positions will be displayed here.
Selling options back to the pool
As already mentioned, options buyers can sell their options back to the pool before expiration.
This essentially means that where before options could only be sold for the value of the option at that time, now buyers can get some of the time value (value of time left until expiry) as well. In simpler terms, it gives buyers the possibility to take advantage of better prices by exercising early.
To do this, click on ‘options’ followed by ‘close’ beside the option you want to sell.
Selling the total amount is a default option, but if you want to sell a fraction of your position, select ‘partial amount’ and enter the amount you want to sell.
Withdrawing liquidity
Click ‘yield’ followed by ‘remove’ next to the position you want to withdraw. On the following pop-up screen, you’ll have a couple of options.
Basic: here you can specify the amount of free liquidity ( i.e. not locked in an options contract) that you want to remove. You can also remove any liquidity that is actively locked in a contract, but you will have to pay a removal cost.
Advanced: positions will show here if they’re locked in an options contract.
Gradual divestment: if your liquidity is locked in a contract, you can use this tab to specify a date to remove your assets. This will ensure that your assets will not be given out to any new options buyers.
