Just like you would not compare an option expected value to the underlying, you should not compare being an LP to holding the underlying. They have different risk profiles.
Visualizing LP'ing in a framework of options can help with this.
- Uniswap V3 LP Tokens as Perpetual Put and Call Options
- Synthetic Options and Short Calls in Uniswap V3
- Rebalancing vs Passive strategies for Uniswap V3 liquidity pools
- Uniswap V3: A Quant Framework to model yield farming returns
- The Replicating Portfolio of a Constant Product Market with Bounded Liquidity
Trading UniV3 Options allows you to simulate a call or put payoff by using a single tick range order A strangle can be emulated by using multiple ticks, note as you increase the ticks you provide over your payoff begins to curve This might be the most liquid place to trade with option like payoffs for any given token pair You can settle your options in any any token pair (not just an ETH put denominated in USDC, but could be in any token) Knowing when to withdraw your liquidity can be hard, if above your tick you might loose a little to impermanent loss (you can think of this as your option being exercised). Best case is probably price rises/below your call/put so that you capture the fees (your premium) and then reverts back below.
Premium is not paid up front, but accrued over time in fees.
Note: you have to consider the time value of money here, as you only earn fees once the spot price crosses over your single tick range (capturing the entire fee rate once it does, ie 0.3%)
- Ideally the spot price crosses over your tick and then back below, in this case you will capture fees twice.
- Functions like a perpetual option (there is no expiry, you must withdraw your liquidity)
- A single tick range order has the exact payoff of a covered call option
- A multiple tick range order has a curved payoff chart
