Theta vaults leveraging Primtive's RMM-01 modeling the payoff function of a covered call.

Primitive Finance is a new DeFi primitive (pun intended) that designs AMMs such that the payoff function for LP tokens mimics a certain payoff function. Their first AMM, RMM-01, aims to replicate the payoff function of selling far out of the money covered calls. For more information, visit their research page here.

This repo contains vaults that automate a covered call strategy leveraging RMM-01 under the hood. This enables users to implement a set-and-forget strategy to capture premiums from theta decay.

Note that this repo is a prototype, and is not intended to be used on mainnet. There are many optimizations to be performed and more testing is needed.

• Flow for rolling over options (duties of the keeper/owner):
  • Call closePosition to burn our RMM-01 LP tokens in exchange for a combination of asset (risky) and stable (riskless). Note that in theory, if our option expires out-of-the-money, we should receive only the asset (risky) token. If our option expires in-the-money, we shuld receive only the stable (riskless) token
  • Set swap path via setSwapPath if necessary to swap all of the vault’s stable token to the asset token
  • Swap all stable token to asset token via swap
  • Call rollToNextOption to update the Vault state in preparation for entering a new covered call position. This updates internal bookkeeping.
  • Set swap path via setSwapPath if necessary to calibrate the vault’s holdings of stable token & asset token to match the desired amount for our RMM pool (this is calculated off-chain)
  • Swap desired amount of asset token for stable token via swap
  • Call openPosition to enter a new covered call position with the desired configuration

This repo uses Foundry for both compiling and testing. You can run forge build to compile the contracts in the repo.

There are many improvements that could be made, starting with more thorough testing to ensure that the vaults operate as intended.

Additionally, since RMM-01 is an AMM, the LP (in this case our vault) must deposit a certain composition of risky asset and a riskless stable. As a prototype, this vault swaps between risky <-> riskless multiple times, incurring a fee from the UniswapV3 AMM which would cut into profits. Updating internal bookkeeping mechanisms to limit the need for swapping would provide vault depositors with increased yield.

Also, the current architecture requires the keeper/owner to calculate optimal parameters (strike, sigma, etc.) off-chain. To mitigate the risk of keeper error, periphery contracts that calculate optimal parameters on-chain using historical data could be implemented.

Inspiration for this project came from this post by Alex Angel (founder of Primitive).

This vault was heavily modelled after Ribbon's V2 Theta Vaults and drew on a lot of components of vault lifecycle and bookkeeping. Ribbon, for context, maintains theta vaults that use Opyn's option protocol under the hood rather than Primitive RMMs.

Basic scaffolding of Foundry was adapted from Frankie's template.