Iron Condor Option Vaults (ICOV)

Iron Condor Option vaults allow users to take either side of an Iron Condor -short an "Iron Condor" or long a "Reverse Iron Condor". There are two main workflows, corresponding to the two sides of the Iron Condor.

1 - Liquidity / Short Options

The Vaults are financed by liquidity providers (LPs) who deposit the underlying at any time of the Epoch. The Liquidity Providers receive a pro-rata share of the profits or losses of the options sold from the time they entered to the expiration of the options (end of the epoch). The liquidity they provide is used as collateral to pay buyers in the event that the options expire in the money.
When depositing into an Iron Condor vault, you are betting on winning from a period of low volatility in the underlying asset.
Depositors benefit the most if the price at expiration stays within a predefined percentage range of the price at the initiation of the vault. This is because, within this range, both premiums collected and collateral are paid wholly to the depositors. However, if prices breach this range, then payouts to buyers start to chip away at the collateral until a max loss is reached.

Details on Depositing

  1. 1.
    Expiration is 2 weeks from initiation of the vault
  2. 2.
    The range of the expiration price where max profit occurs is (approximately) centered around the price at initiation
    and is a percent range
    S0(1R) and S0(1+R) where 0<R<0.5S_0 * (1 -R) \text{ and } S_0 * ( 1 + R ) \text{ where } 0 < R<0.5
  3. 3.
    Arrow sets this percentage to
    R=0.02 or 2R = 0.02 \text{ or } 2%
  4. 4.
    For every dollar that the underlying increases past the above price range at expiration, a dollar is paid out to the buyers.
  5. 5.
    Losses continue until
    S0(12R) and S0(1+2R)S_0 * (1-2R) \text{ and } S_0 * (1+2R)
    where the maximum loss is realized for depositors. Any expiration price below or above those boundaries, respectively, results in the same max loss. See the diagram below.
  6. 6.
    Depositors deposit USDC as the collateral and each contract created requires the collateral of (approximately) S0*R.

2 - Buyers / Long Options

Once a vault has liquidity, buyers can come in and buy options at the prevailing market prices until either the number of available contracts goes to zero or the contracts expire. If the options expire out of the money, they lose their premiums. If the Options expire in the money, the obligations are paid using the deposits provided by the liquidity providers.