stSTXearn
For questions frequently asked about the stSTXearn strategy and token.
Q. How does the stSTXearn strategy work?
A. The strategy alternates between buying and selling options based on a simple trend following system (5 week moving average; MA).
If in a positive trend (price > 5 week MA), we buy a binary call strip (20 and 50 delta) —> investors get cheap upside exposure to a naturally upside biased asset like STX.
If in a negative trend (price < 5 week MA), we sell a binary call (33 delta) —> investors get a base yield from the premium but without tail risk.
Q. Who is Hermetica's counterparty
A. Market makers who are specialized in exotic altcoin options. We trade with them OTC.
Q. Why STX? Why not BTC or an alternative?
A. We've backtested all assets and have strategies that perform well for BTC (as well as other assets). Similar strategies like the binary call strategy described above as well as European Reverse Knock-outs (ERKO) and European Reverse Knock-ins (ERKI).
We have plans to bring BTC denominated strategies to market with/after the sBTC release.
We’re always thinking about adding new assets and strategies but this takes time as we run our detailed backtests to ensure everything is to our standards.
We can also trade options for a different asset than the deposit asset. For example, we could do a stSTX denominated strategy that trades BTC options but we're keeping it simple and focused on STX for now.
Q. How are your fees structured?
A. The fee structure consists of a 1% annualized management fee and a 10% performance fee. If the weekly strategy is profitable, the weekly performance fee is charged on the premiums earned and the weekly management fee is charged on the assets managed by the strategy. If the weekly strategy is unprofitable, there are no performance fees charged.
For more information about fees, please refer to this section.
Q. Are depositors to the stSTXearn strategy at risk of loss of principal, impermanent loss, or other market related risks?
A. In the stSTXearn strategy the maximum portfolio loss is 2% in any epoch.
Hermetica sells options which typically comes with taking on a lot of tail risk. We mitigate this risk by only selling binary options. The binary option structure allows the strategy to generate yield without any significant tail risk (the max risk per epoch is hard coded to 2%).
Q. Is upside limited in the stSTXearn strategy?
A. The strategy does not limit your upside, the max risk per epoch is strictly limited to 2%. No other tail or hidden risks.
In a bull trend the strategy buys a binary call strip with one at-the-money barrier and one far-out-of-the-money barrier. The ATM option is designed be hit frequently whereas the OOTM option captures big moves. The payouts for binary options are always defined.
In a bear trend the strategy sells binary call options. This brings a steady yield without tail risk exposure. You can read about the strategy in more detail here.
Q. What does fully non-custodial mean in the context of a Hermetica token?
A. Simply put, it means that we can’t access more than 2% of funds per epoch and neither would an attacker.
Even if all our systems are compromised, including deployer and admin keys for our smart contracts, an attacker would not be able to access the funds in the strategy.
Q. Where does the yield come from? For someone to profit, someone has to lose - who is losing?
A. Market makers pass on the risk of the options they trade to the rest of the market, their profit comes from the spread. The risk is distributed across the market. There are always winners and losers in every market, but it's not like a single person/entity is taking the other side of our position.
The primary differentiation here is that we're using binary options, which creates much clearer payout structures vs naked options. Long options has a losing profile over time because you're actually buying expensive volatility. Buying a binary call strip however eliminate the volatility aspect of the long call, and instead give you a pure probability structure.
Q. How did you guys do your backtest? What assumptions did you make since historical vol data for altcoins is hard to come by?
A. Market makers won’t give us historical data and no one was quoting STX historically, so our backtests inherently contain assumptions.
We've done two backtests:
With vol estimates based on BTC. We use historical BTC vol + an exponential buffer for altcoins. So, for example, 40 BTC vol is 44 altcoin vol, 100 btc vol is roughly 130 alt coin vol.
With fixed strike prices.
With fixed strike prices.
Long 50 delta at 1% above spot
Long 20 delta at 15%-17.5% above spot (15% begin of trend / 17.5 3 weeks in bull trend)
In a bear trend (price > 5 week MA):
Short 33 delta at 7%-10% (10% begin of trend / 7% 3 weeks in neutral/bear trend)
We assume 67% funding in a bull trend and 5% funding in a bear trend.
To note is that the results from the second backtest (fixed strikes) gives worse / more conservative results, so this is the one we are using in our communications.
Our backtests are a work in progress. It’s important to remember that we are conservative in our assumptions and we've a good understanding of what prices don't work and will stop trading for the strategy if we get quoted prices above expectations.
Q. How often are stSTXearn rewards distributed?
A. The strategy runs on a weekly epoch; profit and losses are realized on a weekly cadence and accrue automatically to the token.
Last updated