Crab Strategy
The Crab Strategy is an advanced vault mechanism designed for users looking to capitalize on the advantages of shorting sqOSMO without speculating on the price direction of osmo. It achieves this by pairing short sqOSMO (the primary source of returns) with long osmo, creating a position that maintains a near-zero delta in relation to osmo's price — a quintessential short volatility approach.
The inner workings of the Crab Strategy can be likened to the continuous sale of a straddle that undergoes periodic adjustments to stay "at the money". Its profitability in between rebalancing hinges on osmo's price shifts being smaller than sqOSMO's inherent volatility. Should osmo's price swing exceed this range, the strategy could face losses. Essentially, the Crab Strategy operates on the premise of high squosmo volatility, implying a potential overvaluation of squosmo.
Rebalancing occurs intermittently if the vault becomes imbalanced or when there's a marked price shift in osmo (exceeding 20%). This adjustment involves either purchasing or liquidating sqOSMO to maintain delta neutrality. The overarching objective is to ensure profitability in USD terms.
When Should Crab Perform Well?
The Crab Strategy performs in lateral market scenarios. In essence, it's tailored for times when osmo's price meanders within a reasonably constant bracket marked by low volatility phases, implying OSMO's price remains stable. Ideally the strategy shines is used when actual sqOSMO volatility is less by its implied volatility.
Where Does The Funding Come From?
To earn to osmo² potential upside, coupled with a safeguarded downside and zero liquidation risks, a daily funding rate paid by long sqOSMO holders. This regular funding serves as a reward for Crab Strategy depositors. Funding rates are calculated using the difference between the Mark Price (the ongoing sqOSMO trading price) and the Index Price (OSMO²).
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