Provide liquidity

When providing liquidity to an options market, LPs will receive LP Shares that gives them a proportional entitlement to all trading fees earned AFTER they have provided liquidity.

Providing liquidity at Charm can be very lucrative with returns around 6% per month from trading fees in the markets that have already settled. However, it is risky and you can loose up to 100% of your funds. Therefore please read this page in detail and understand the risks, before providing liquidity.

The following describes the step-by-step instructions to provide liquidity at Charm.

Step 1. Set up and fund a Metamask wallet

Step 2. Click 'Connect Wallet' at Charm :

Your wallet address should appear in the top right corner:

Step 3. Click 'Pool' to go to the liquidity page:

There are 4 pools where you can provide liquidiy. USDC is used to provide liqudity in all put options markets, and the underlying (eg ETH or WBTC) is used to provide liquidity in the call options markets.

Step 4. Click 'Deposit' next to the market you wish to provide liquidity. The steps below assumes the 'ETH Calls' market was chosen:

Step 5. A new page should appear where you can deposit liquidity.

If you want to deposit around 0.007 worth of ETH, then pick the amount of LP shares so that the total cost is around 0.007:

Please pay close attention to the price impact. It indicates the maximum arbitrage opportunities that are available to traders immediately after you provide liquidity.

A larger price impact means arbitragers can extract more value from your deposit in order to keep the option prices in line, but it will also mean you can gain more from trading fees because larger trade sizes are possible.

Therefore it is advisable to only deposit in small amounts, if you are not comfortable with the price impact.

Please make a note of the total cost.

If will be used to calculate your profit and loss from liquidity provision. See Step 4 in withdrawing liquidity for further details.

Step 6. Click 'Deposit ETH' if you wish to proceed. The following will appear in Metamask:

The total cost cost here is 0.007648, rather than 0.007283 because a 5% slippage protection is included if the price of your LP Shares changes after your purchase, but before the trade is executed on-chain. The 5% will be refunded to you if it is not required.

The Metamask box indicates the total cost including estimated gas fees is 0.040021. This INCLUDES the amount that will be refunded to you per the information box above.

Step 7. Click 'Confirm' to proceed with the deposit.

Step 8. Charm and Metamask (not show below) will show the transaction is 'Pending':

Step 9. When your transaction have been confirmed on the Blockchain, you will received the following confirmation from Metamask:

Step 10. Click on the above to view and check your transaction on Etherscan:

From the above, you can check the following details of your transaction:

  • The refund is the amount returned to you per step 6.

  • The LP shares you purchased and the options market, should match the details in step 5.

  • The total cost before refund should match the amount in step 6.

  • The final gas fee should be lower than the Metamask estimate in step 6.

Step 10. Hedge your position by selling options.

When providing liquidity to the calls markets, LP exposure is similar to buying a call option with the lowest strike price (eg buy calls with ETH strike price $480). If you are not comfortable with this exposure, you can reduce it by selling call options with the lowest strike price (eg sell calls with strike price 480):

Example of hedging in ETH calls markets: Selling calls with strike price of 480, at a total cost (eg 0.007228)that is equal to the cost or your LP shares.

When providing liquidity to the puts markets, LP exposure is similar to buying a put option with the highest strike price (eg buy puts with ETH strike price $10,000). If you are not comfortable with this exposure, you can reduce it by selling put options with the highest strike price (eg sell puts with strike price 10,000):

Example of hedging in ETH puts markets: Selling puts with strike price of $10,000, at a total cost (eg 100.2 USDC) assuming you have bought 100.2 USDC worth of LP shares in the puts market. at is equal to the cost or your LP shares.

Congratulations! You have now provided liquidity to a 24/7 options market that never sleeps.

Your liquidity will help future traders place larger trades, and this means you can benefit more trading fees. For the markets that have settled, 1 USDC of liquidity have generated approximately 8.75 USDC worth of trades, and this has resulted in LPs earning around 6% in trading fees in 1 month.

Your chances of getting similar returns will be increased by purchasing a hedging instrument at Charm (in step 10), and only deposit in small amounts (in step 5).

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