Killer Crossover, Mvmt. I: LUNA/Solana

    Determine how many weeks during the past month that LUNA’s price has increased more than 15% in a 7-day period. Based on this performance, what insights or implications can you draw about the true profitability of a LUNA covered-call strategy?

    Introduction

    Friktion is DeFi powered risk-adjusted return generation strategy for DAOs, individuals, and traditional institutions. It includes permissionless access to institutional-grade structured products and risk management.

    DeFi is growing at an unprecedented rate, creating thousands of new projects, assets, and communities. The average existing DeFi user chases yield, largely in units of the native token, while taking on various risks. To perform this optimally requires an infinite supply of time and energy in identifying new farms, constructing a portfolio, and actively managing risks (such as correlation, price, and leverage).

    Friktion on Solana offers a “covered call” strategy for numerous assets, including LUNA. This strategy’s overall return depends on how often the call options are exercised, i.e. how often LUNA ends up above the strike price of the option.

    Loading...
    Loading...
    Loading...
    Loading...

    LUNA Price Analysis

    The period under analysis is from January 24 2022 to January 23, 2022. We shall do a week-by-week analysis of LUNA price action for 7-day periods.

    Insights & Implications

    The summary of the change in the price of LUNA for the past month are as follows:

    • Week 1 => -25%
    • Week 2 => 11.5%
    • Week 3 => 17.9%
    • Week 4 => -2.5%

    Objective

    The objective is to determine how many weeks during the past month that LUNA’s price has increased more than 15% in a 7-day period. Based on this performance, we draw insights or implications about the true profitability of a LUNA covered-call strategy.

    The chart below shows LUNA price actions from January 24 to January 31, 2022.

    LUNA price opened at 68.2 USD on January 24 and closed at 51.4 USD on January 31, 2022. This represents a -25% drop in the price of LUNA.

    The next chart shows LUNA price action from February 01 to February 07, 2022.

    LUNA price opened at 51.54 USD on February 1 and closed at 55.1 USD on February 7, 2022. However, LUNA reached a high of 57.5 USD on February 5, which will be used as the strike price. This change in price represents an 11.5% increase.

    The next chart shows LUNA price action from February 08 to February 15, 2022.

    LUNA price opened at 69.5 USD on February 8 and closed at 81.1 USD on February 15, 2022. However, LUNA reached a high of 82.0 USD on February 13, which will be used as the strike price. This change in price represents an 17.9% increase.

    The next chart shows LUNA price action from February 16 to February 23, 2022.

    LUNA price opened at 56.5 USD on February 16 and closed at 55.1 USD on February 23, 2022. This represents a -2.5% drop in the price of LUNA.

    We can see that, there are 2 out of 4 weeks with positive gains, out of which only Week 3 made more than 15% in a 7-day period.

    Out of the data presented, we can conclude that out of every four (4) seven day period, if the strike price is at 15%, the covered call will execute only once.

    Covered calls are generally considered a neutral-to-bullish strategy, and they work best when you expect the underlying asset to maintain or slightly increase in value.

    Investors are on the hook for losses if the underlying LUNA price declines in value. While they can offset some of these losses with premium income, they still may be in the red on a net basis.