Example

Discover how our platform equips you with advanced tools and insights, empowering you to make more informed and strategic trading decisions.

To give you a little more flavor of what we offer. Let's walk through one of our trading tactics.

Our early-stage strategy at WAARN Finance revolves around blending multiple derivatives. By strategically combining these instruments, we craft hedges that complement each other. The result? A clear pay-off graph that lays out potential profit zones for our members. And while this is just one, as we evolve, expect diverse visualizations tailored to each unique tactic. In essence, we aim to make complex tactics transparent and understandable.

The First Tactic

We will be using a long-only grid (see here for Binance version), in combination with a put option, and a short position.

The Long-only Grid

A common fixture in many forex and now crypto traders' toolkits, the long-only grid strategy is favored for its potential to harvest profits in range-bound markets with a slightly bullish outlook. Exchanges often encourage this trading style, as they can draw liquidity from us retail traders who employ this method.

But here's the catch: while this grid strategy might sound straightforward, its real pay-off graph isn't as commonly understood. Used in isolation for extended periods, this strategy can lead to unexpected losses from unforeseen market events.

To shed more light, let's dissect the pay-off graph of a basic long-only grid:

Payoff graph of a long-only grid construction. Here, we use ETH as the underlying asset. We set the upper bound at 1,700 USD, and lower bound at 1500 USD, The Y-axis is the profit and loss, and the X-axis is ETH price.

Utilizing ETH as our example asset, the pay-off chart for the long-only grid is set with boundaries at 1,500 (lower) and 1,700 (upper), and a capital allocation of 1,500 USD. The market price, at the time of this analysis, is approximately 1,580 USD.

As you can see, this strategy leaves us vulnerable to infinite losses if the price dips beneath our grid's lower threshold. While we might be confident that the price won't breach a certain floor, the usual safety net, a stop-loss, isn't always foolproof.

Seasoned traders are well-aware of the double-edged nature of stop-losses. On occasion, prices can jerk unpredictably due to transient market shifts or brief liquidity droughts. In such scenarios, the grid can be prematurely halted, even if prices soon return to their defined range. The result? Losses are locked in, even though the strategy might have continued to be viable.

The Hedge

To mitigate the potential downsides of the long-only grid, we introduce a two-fold hedging methods: deploying a put option and initiating a short position. Let's delve deeper into the put option first.

For clarity, it's crucial to understand the standalone pay-off dynamics of a put option. Let's examine its pay-off graph:

Payoff graph for a put option with a strike price at 1,500; a premium of 11.3 USD; and an expiration date 2 weeks away.

From the graph, it's evident that the put option begins with a dip into the negative region, only swinging into profitability once the underlying asset—here, ETH—falls below a certain threshold, in this case, around 1,480 USD. This type of option is known as an OTM (out of the money) option since the strike price is lower than the prevailing market price.

At first glance, the put option might appear disadvantageous. But remember, its primary purpose isn't immediate profit. It's about securing your position. When combined with the long-only grid, this protective strategy paints a different picture:

Combining the pay-off from a long-only grid and a put option

The pay-off graph illustrates our approach: the long-only grid optimizes profits within a set range, while the put option caps potential losses, safeguarding against significant market downturns. This combo eliminates the need for a stop-loss, ensuring we're always poised to capitalize on price rebounds, ensuring both profit potential and risk management.

So, where does the short position come into play?

A Different Kind of Hedge

Suppose our market view is layered – initially bullish with expected fluctuations between 1500-1700 USD, which aligns well with our option + grid strategy. However, what if a dip below 1500 USD could trigger a market scare, potentially leading to a further fall?

This is where integrating a short position becomes strategic. It’s not just about hedging against one scenario but preparing for a dual possibility, including the potential for a Black Swan event affecting ETH. Here’s how such a setup might look:

We reallocate as follows: 1300 USD into long-only grid; 150 into a Short position; and 45 into put option (we buy around 4 contracts)

As we can see, during a normal market condition, we will only lose the amount of initial premiums paid, and in case the price falls below around 1480, we will start to gain profit.

Before you get too worried, we know the presented 2D payoff graph provides might seem unappealing to some with a large portion being in the negative region. But that is because the visualization isn't complete. The missing element? Time.

Enter the Time Value

With our platform's advanced tools, we can introduce a third dimension to this graph, encapsulating the time variable. This gives traders a more comprehensive view of the expected payoff across different timeframes. Here’s a look at this visualization:

Setup: 2000 USD allocated to long-only grid, similar boundaries as above. 200 USD is allocated to Short position. 50 USD is allocated to buying 4 put options

Decoding the Visualization

The yellow line acts as a boundary, segregating profit zones (above) from loss zones (below). What's the underlying mechanism? By using the Monte-Carlo method, we map out potential price paths over time, and then deduce the expected value of the long-only grid based on these paths. We use this method as the grid's profitability varies with price movements.

After calculating the expected value for various price points hourly, we amalgamate these with the impacts of the put option and short position. The result? A comprehensive view of the strategy's profitability across time and price, illustrating when and where you're most likely to see gains.

The Tool's Power

This tool doesn't dictate your strategy but empowers you. It offers clarity, enabling traders to align their positions better with their market outlook—giving you the reins to make more informed hedging decisions. At the same time, it allows you to adjust the proportions and ratios to find the best values.