Sep 25, 2023

Passage Payouts: Straightforward Time-Based Returns

Passage Payouts

Passage Payouts: Straightforward Time-Based Returns

Passage Payouts: Straightforward Time-Based Returns for DeFi Options

Passage is a straightforward method for playing volatility, allowing users to choose whether an asset price will break out of or stay within a range over a certain period of time. This concept of time-based returns is different from most other derivatives products but quite simple to understand. Here’s how it works for both sides of Passage.

Breakout Passage

Taking the “Breakout” side of a Passage means a trader believes the underlying asset price will exit the stated range during the selected time period. It doesn’t matter if the breakout occurs on a price increase or decrease; these are pure long volatility positions. The breakeven point for a “Stay In” or “Breakout” position occurs halfway through its term, so for a 2-day Passage the 24-hour mark would be breakeven.

For Breakout positions, the sooner price exits the range the better. At the start of the term, the payout is 200% and decays linearly until reaching 0% at the end of the term. With the example below, breakouts occur at a BTC price of $16,170 on the low end, and $16,830 on the high end. Either of these points sit 1% off BTC spot price at the time of purchase, giving this Passage a width of 2%. Once a breakout occurs, the Passage will be automatically claimed using Chainlink Automation, and returns will be added to the user’s balance and become available for withdrawal.

Below is an illustration of a Breakout position. The user has the highest potential payout at inception, meaning if BTC broke above $16,830 or below $16,170, they would earn a 2x on their initial investment.

Stay In Passage

On the other side of BracketX’s volatility market, a Stay In Passage provides short volatility exposure. Traders taking this side believe the underlying asset will remain within a certain range over their selected term. Payoff dynamics are the inverse of a Breakout Passage, meaning the returns start at 0% and rise linearly over the contract term, maxing out at 200% upon expiration. The breakeven point still occurs midway through the term. If price does break out of the range before the term ends, then the payoff is distributed according to the fraction of the term that has passed.

Quick example: On a 2 day Stay In Passage price falls below the low end of the range after 36 hours. This is equivalent to 75% of the term, so the trader will have accrued 75% of the maximum 2x payoff. If the Passage was purchased for $100, their return will be $150 ($100 * 2 *.75).

A Product for All Market Conditions

When you’re able to make predictions on volatility over a term rather than just directionally betting on price, you have the flexibility to adapt to all market conditions. Take Q3 2023 for example; from late June to mid-August, BTC & ETH prices stayed within a tight range. Holding spot in these dead zones doesn’t generate returns, and perps trades are further complicated by funding payments as well as liquidation risk when applying leverage. When markets dropped by 10% in a single day during August, spot holders and long-biased perp traders took another hit.

June-August BTC price action

This is far from the first time we’ve seen this pattern of extended low volatility followed by quick spikes. Experienced options traders recognize this and use short/long volatility strategies to profit from the trend. Passage will allow traders of all experiences to easily implement these strategies.

Notice the spike and plateau nature of BTC volatility

Having volatility trading in your arsenal is extremely useful, a missing link for many DeFi traders. Passage packages long/short volatility options-style exposure into an easy-to-use structured product with straightforward time-based payouts.

Passage Documentation:

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