Option Strategies

Types of Options

The Moon Module primarily utilizes European strip put options with 8-hour expiries. These options are re-struck at the end of each period, ensuring continuous coverage. Additionally, the module employs weekly and monthly options to maintain flexibility and adapt to varying market conditions.

Option Rules

• Options will be weekly or monthly, with at least two active tenors.

• A set of strikes will be used, roughly 30% - 70% Out of the Money (OTM).

• The structure will resemble the VIX with weights of $1/strike^{2}$, so the left tail is most heavily weighted.

• The Collateral Vault will seed the starting option basket in the nearest tenor.

• When a new position is entered during the week, additional options are opened in the back tenor.

• When an existing position is exited during the week, options are closed in the front tenor.

• The goal is to keep the weighted duration stable and cause a natural rolling of the position.

• The choice of what tenor to buy/sell can be adjusted based on the LTV and the needs of the participating parties.

Strike Prices and Weighting

Strike prices for the options range between 30% and 70% Out of the Money (OTM). This range is selected to provide a balanced approach to risk management, capturing significant price drops without incurring excessive costs. The weighting structure follows a model similar to the VIX, with heavier weights assigned to the left tail (lower strike prices) to prioritize protection against substantial declines.