Create a BAL Call Option on UMA

This is a proposal to launch BAL call options using UMA Protocol.

A brief description of a call option is:

A call option gives the buyer the right, but not the obligation to buy an asset at a specified price (strike) and a specific time period (expiry). The simplest use for a long call position is the ability to speculate on the appreciation of an asset with leverage while also limiting your downside. However, the flip side to that is the value of the option will depreciate or decay very quickly to zero if it does not trade above the strike price.

Here is an ELI5 twitter thread word a read: Thread by @thevdm1 on Thread Reader App – Thread Reader App

And here is an internal learning session with UMA presented by Kevin Chan, former treasury desk manager at Goldman Sachs New York.

Use some BAL tokens from the ecosystem fund to provide liquidity for a BAL call option with a strike price of $75 and expiring at the end of May, 2021. (These parameters are not yet set in stone, this is just a starting point.)

If you are bullish $BAL you can buy the calls for leveraged, limited downside exposure on a rally. If you are a holder of $BAL and want to collect a premium while you wait to take profits then you can mint the options and sell them. This gives you the premium plus is a way of taking profits but only on a rally.

These options are also great incentive tools, and could eventually be used as liquidity mining payouts. They align incentives because the recipients have a vested interest in good token outcomes, and it protects the treasury from sell pressure in the event of a flagging price.

Second-order benefits
Balancer governance was recently airdropped UMA’s KPI Options tokens which will appreciate in value as UMA’s TVL increases. Creating these BAL call options will have the effect of increasing UMA’s TVL.

The Balancer and UMA communities will have an occasion to work together and cross-promote our coordination.

The ecosystem fund would lock BAL tokens into UMA’s audited contracts to mint the calls. As a sponsor and LP, the ecosystem’s “risk” would be that if BAL goes over the strike price, it will be selling BAL into the market as the price climbs.

This is “right-way” risk for the foundation. This is less about the foundation earning money, and more about the foundation having a capital efficient way to provide a service to its token holders.

We suggest that the foundation does pull liquidity before expiry (~1 week) – Otherwise, the call options can expire “out of the money” and create strange situations with regard to impermanent loss. When the foundation pulls liquidity the outstanding call options would essentially be untradable and only redeemable if they expire “in the money” on May 31st.

Scenario 1: Price moves from .50 to $2 and the foundation pulls liquidity, and BAL call expires valueless → Foundation walks away with more BAL.

Scenario 2: Price moves from .50 to $2 and the foundation pulls liquidity and the option expires “in the money” → Foundation will be awarding some amount of BAL to option holders.

Steps forward
If the community supports this proposal, the UMA “Super Umans” are eager to support implementation of this proposal. The required governance proposals are already being passed in UMA, so it should take very little time on the Balancer team’s side.

Being a KPI option holder, my take on this is going to be slightly biased, but I think that such a collaboration be healthy for both ecosystems.

Personally, I’d probably be inclined to load up on a few BAL options, although not entirely sure the presented numbers are exactly perfect yet. I’m by no means erudite on the subject, however.

Looking forward to seeing this unfold! Am I correct in assuming that this would need to move rather quickly, as the KPI incentives are ending in less than 3 months?