Difference between CLAMM Fees and Option Premiums
In the previous article, we compared impermanent loss for a CLAMM tick to the payoff profile of a short option position with an equivalent strike price, noting their identical payoffs.
With identical risk profiles, we might expect CLAMM LPs and option writers to earn similar fees. However, as we’ll show, CLAMM LPs often receive significantly lower compensation.
Option Premiums
Option writers earn premiums for taking on volatility risk. The premium value correlates with the probability of the option expiring in-the-money and is calculated using models like Black-Scholes, which consider factors such as spot-to-strike price difference, volatility, and time to expiration.
For example, a user writing 1 call option on $ETH with a one-week expiry and a $1,750 ATM strike price (with 40% volatility) would earn approximately $38 in premiums.
CLAMM LP Fees at the Tick
CLAMM LPs earn fees based on their share of pool liquidity, trading volume, and trading fee percentage. In major pools like ETH/USDC, fees are generally around 0.05% but can be as low as 0.01%.
Assuming a 0.05% fee, each time the $1,750 tick is crossed, an LP would earn about $0.88 in trading fees. This means that, for an equivalent position, an option writer would earn 43 times the fee income of a CLAMM LP, despite sharing the same payoff profile—a significant disadvantage for CLAMM LPs.
CLAMM LP Fees Across a Range
Only one tick can be active at any given time, meaning a CLAMM LP with a price range earns fees solely from the current active tick. Even when the spot price shifts into a new tick, only that specific tick earns fees, while the rest of the range remains idle. As a result, liquidity outside the active tick is unutilised, limiting fee potential.
Key Takeaways
- CLAMM LPs earn substantially lower fees than equivalent option writers, despite bearing similar risks.
- CLAMM LPs with a range will always have idle liquidity, as only the tick containing the spot price earns fees.
About Stryke
Stryke is a decentralised options protocol that focuses on maximising liquidity and enhancing gains for option buyers while minimising losses for option writers—all in a passive approach.Stryke employs option pools that enable anyone to effortlessly earn yield. The protocol provides value to both option sellers and buyers by ensuring equitable and optimised prices for options at various strike prices and expiries, achieved through our proprietary, cutting-edge option pricing model designed to mirror volatility smiles.
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