A Covered Call strategy is a standard in Corporate Finance. While it can limit the upside of the treasury it’s well known way to continuously generate yield for the Compound DAO. With the recent direction shift of the Morpho Partnership I believe the DAO should generate multiple streams of fee generation. I am happy to support this proposal.
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I don’t want to make accusations without evidence and I don’t know enough to analyze this. But common sense dictates anyone offering more than 5% return is likely balancing that with risk, and someone that can honestly make 15-35% return yearly safely wouldn’t be asking me for money to do so because they’d be retired on a yacht somewhere. Instagram is filled with ads for 15% returns and we ignore them for a reason. People with no money promising 15-35% returns you should run away from, people with lots of money who can achieve those returns will be doing it themselves not bothering to chase us for money. Common sense to me and I suspect most others dictates we ignore this proposal.
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Hi @misher and thanks for your feedback. As far as we interpret it, there seems to be a misunderstanding of what an annualized yield means in the context of a covered call.
It is not a constant yield we just generate without any risks or variables, but a different representation of the option premium. Annualizing the option premium is just done to help put it into perspective and make it somewhat comparable to basic yielding products.
For example,
if you use $1.4M worth of COMP (at today’s quotes, we checked hence delay in reply) and write a call with 130% strike and 180-day duration, the upfront premium would be $125,145 = ~8.4% of the notional value of $1.4M worth of COMP, which if annualized is ~16%.
So the annualized yield is basically annualizing the option premium relative to the notional value.
Assuming prices stayed flat, you could repeat again in 180d at same terms, which obviously is a simplification but you get the idea. Hope that helps!
We share a similar view to @Gauntlet with an additional comment on buybacks. The impact of buybacks doesn’t always contribute positively to eco growth - particularly when protocol revenue is invested to purchase tokens at a high market price.
An alternative to a fixed threshold arbitrarily set at $50 (now trading at $39) would be to establish rules based on market dynamics, earnings multiples, and indicators like MA/EMA/VOL—and trigger buybacks when specific ratios fall below a defined threshold.
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Thanks for engaging with the prop @ExaGroup, we previously responded to Gauntlet’s comments here, and address your buyback comment further down in this post.
Over the past few months we’ve appreciated the thoughtful feedback from delegates, community members, and the ongoing forum discussions. Throughout this process, we have considered all recommendations and made key adjustments to align the strategy more closely with Compound DAO’s priorities.
As a last measure, we’re changing the initial usage and route of the USDC, removing the Enzyme vault out of the equation to instead support liquidity on Compound itself. Resulting cToken positions will be used for cash-secured puts for strategic COMP token buybacks when appropriate. More details below:
Key Updates to the Proposal since V1
Focusing Exclusively on the COMP Covered Call Strategy
In response to Gauntlet’s concern regarding the depletion of working ETH capital, we have removed the ETH strategy from this proposal and are focusing exclusively on the COMP treasury. We propose using a covered call strategy to generate sustainable USDC-denominated yield while maintaining strategic exposure to COMP.
Deploy Converted Stablecoins to Support Compound’s Liquidity
From our discussions so far, we found that the most value-aligned way to deploy stablecoin proceeds is within Compound’s own lending markets to support liquidity supply and foster borrowing activity on COMP.
While funneling stablecoins into external lending markets could potentially generate higher yields, the feedback we received indicates that deploying stables within Compound is strategically more aligned with the protocol’s long-term interests.
Using Yield-Bearing cStablecoins for Strategic Buybacks
Building on feedback from different delegates, we propose using the converted stablecoins from the options strategy to strategically defend the COMP price at key levels through cash-secured puts using Compound-deposited, yield-generating stablecoins, as deemed appropriate pending market conditions.
In other words, if a conversion from the covered call strategy occurs—say, for example, $1 million worth of COMP is sold at a 130% strike price for $1.3 million USDC—we deposit the USDC into Compound. If the COMP price needs to be defended (see the ‘Buyback Triggers’ section below), we use a portion of the yield-bearing Compound USDC as collateral to write cash-secured puts. This allows us to earn additional yield on yield while converting USDC back into COMP if the price falls below the put strike levels, thereby defending and acquiring COMP at favorable prices—eliminating any potential strategic overlap related to USDC accumulation. The bought-back COMP can then be used to rerun the covered call strategy, continuing the yield generation cycle for the Compound DAO.
To optimize execution, we will use technical market signals to help identify and trigger buyback opportunities systematically, see below for further elaboration.
Premium Proceeds to Pay for Delegate Program, Developers, or [insert growth initiative]
The DAO could draw on the USDC premiums and conversion amounts -if any- generated from the covered call strategy to cover ongoing operational costs, such as the delegate program, development work, or whatever it may be.
Execution Plan
1. Deploy COMP for Covered Calls
As outlined previously, we propose using COMP to write out-of-the-money call options that balance maximum upfront premium while keeping conversion probability reasonably low. Since the most recent feedback-based adjustments to the proposal means less focus on depositing USDC into a yield-generating vault and more so on rolling an “options wheel”, we will also adjust the strategy parameters to lower the conversion probability.
- We’ll still target an average 15% annualized option premium, with a +/-5% range caveat in the short term following the lowered conversion probability target.
- Expiry for covered calls will not exceed 180 days.
- If no suitable covered call opportunities meet these parameters, Avantgarde will wait rather than forcing suboptimal trades.
See yesterday’s quotes on a notional amount of $1,480,050, with premiums ranging between 13.2-19.4%:
2. Deploy Stablecoin Proceeds into Compound Lending Markets
- All stablecoin proceeds from option premiums and any COMP conversions will be deposited into Compound lending markets, earning additional yield via Compound-deposited stablecoins cTokens.
3. Cash-Secured Puts for Strategic Buybacks
- We propose continuously monitoring market conditions using technical indicators, as suggested by @ExaGroup.
- If an attractive buyback opportunity is identified, the cTokens will be used as collateral to sell put options on COMP with:
- Strike prices between 80-100% of the spot price.
- Expiries of up to 90 days to optimize for stablecoin liquidity.
Buyback Triggers
Incorporating ExaGroup’s feedback, we propose monitoring key indicators to objectively identify buyback opportunities:
- RSI-Based Trigger: If RSI (14-day) drops below 30, COMP is considered oversold, signaling a potential buyback opportunity.
- Moving Average Crossover (SMA-14 & SMA-50): A buyback signal is confirmed when SMA-14 crosses above SMA-50 after a downtrend.
- MACD Confirmation: If MACD crosses above its signal line, this reconfirms positive momentum and a potential buyback opportunity.
- Market & Earnings Multiples: Additional fundamental market dynamics and earnings multiples can be incorporated to refine buyback execution.
Below is an illustration of historical buyback signals based on these indicators:
Final Remarks
With the refinements outlined above, we believe this proposal strikes the right balance between:
- Activating idle COMP for yield generation.
- Ensuring treasury sustainability.
- Executing strategic, systematic buybacks using yield-bearing cTokens for cash-secured puts.
Given the positive feedback we’ve received from multiple delegates over the last few months, as we have recently stated in this thread, we believe the time is right to move forward with this proposal soon.
As a reminder:
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Liquidity for writing calls and cash secured puts has been validated; i.e. counterparty interest with institutional trading firms has been confirmed.
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If successful, the execution of this proposal will be managed through the same multisig structure as the recent Morpho proposal led by Gauntlet; which we hope will be a 3-out-of-5 multisig managed by Avantgarde, Myso, 2 signers from the Compound Governance Working Group, and 1 additional signer to be confirmed.
We look forward to continued engagement with the community and will prepare a Tally governance proposal for consideration shortly and as always welcome any additional feedback to ensure the best possible outcome for Compound DAO.
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So the multisig ( within its permissions) can gain that voting power?
Thanks for the question @Gizmoh. The answer is no, there’s no voting power if tokens are not delegated; which they won’t be under this proposal.
We do apologies for the confusion, these advanced treasury controls that you cite are unrelated to the current setup and was shared as an option in v1. Unfortunately, forum settings prevents us from editing the initial post any further. We’ve instead opted for a multisig for the flexibility and fine-tuning in execution that it offers, and to avoid the rigidity and added governance overhead that would both slow down the execution and possibly hurt the performance of the strategy as a result.
The multisig is controlled jointly by Avantgarde, Myso, as well as PGov and Arana from the Compound Governance Working Group, and we’re looking to add a fifth delegate (awaiting answer). This means that if Avantgarde was to try and delegate voting power to itself this would immediately be noticed by the co-signers, who would block any such transaction and inform the community.
Hope that clarifies things!
The proposal is now LIVE on Snapshot: A Growth-Earmarked Treasury Strategy for Compound
See the latest updates and version of the proposal below.
Updates to the Proposal since V1
Based on feedback, a number of changes have been made to the proposal since first draft:
Lowered COMP amount to $1.5m
- Ask lowered from $5m to $1.5m as a first pilot.
Focusing Exclusively on the COMP Covered Call Strategy
- Citing Gauntlet’s concern over working ETH capital, we have removed the ETH strategy and are focusing exclusively on the COMP strategy.
Deploy Converted Stablecoins to Support Compound’s Liquidity
- Using external lending markets may generate higher yields, but the most value-aligned way to deploy stablecoin proceeds is within Compound’s own lending markets to support liquidity supply and foster borrowing activity on COMP.
Using Yield-Bearing cUSDC for Strategic Buybacks
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Stablecoin proceeds from the options strategy will be used to buyback COMP price at key levels through cash-secured puts using Compound-deposited, yield-generating cUDSC, as deemed appropriate pending market conditions.
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If a COMP conversion (despite keeping probability reasonably low) occurs from the options strategy, we deposit the USDC into Compound and use the yield-bearing cUSDC as collateral to write put options—earning yield on yield while converting USDC back into COMP at favorable prices—eliminating any potential strategic overlap related to USDC accumulation.
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To optimize execution, we will use technical market signals to help identify and trigger buyback opportunities systematically, see below for further elaboration.
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The bought-back COMP can then be used to rerun the covered call strategy, continuing the yield generation cycle for the Compound DAO.
TL;DR
This proposal aims to activate some of the idle COMP in the Compound treasury to improve capital efficiency and boost revenue. The strategy has three parts:
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COMP Yield Strategy: Use COMP to generate USDC yield. This strategy maintains COMP exposure whilst making opportunistic sales possible at higher prices. In the meantime, it targets to deliver 15% or more annualised net USDC-denominated yield on COMP tokens.
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Deposit USDC into Compound for cUSDC: Deploy USDC proceeds from the COMP strategy into Compound lending markets, earning additional yield via Compound-deposited cTokens.
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cUSDC & Yield-Generating Buybacks: Use yield-generating cUSDC as the underlying for put options to earn yield on yield while buying back COMP at favourable key levels.
As each COMP → cUSDC → COMP cycle completes, the strategy can be continuously rolled over to keep generating yield for the DAO.
Outcomes:
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Earn USDC-denominated yield on COMP (targeting 15% APY).
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Earn yield on cUSDC proceeds deposited into Compound.
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Earn yield on yield while buying back COMP at key levels.
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Enhance capital efficiency and financial sustainability.
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Stimulate trading volume and market liquidity.
Ask:
- 34k COMP (≈$1.5m as of March 25th) to execute on the outlined strategy to generate USDC for the treasury.
Proposal
This proposal presents a treasury strategy to complement Gauntlet’s reserve management, with the aim of improving capital efficiency and revenue on idle treasury assets to support the DAO’s capacity to fund growth initiatives and improve financial sustainability. The proposed overall strategy includes three parts:
1. COMP Yield Strategy
We propose using COMP to write out-of-the-money call options that balance maximum upfront premium while keeping conversion probability reasonably low. Since the most recent feedback-based adjustments to the proposal means less focus on depositing USDC into a yield-generating vault and more so on rolling an “options wheel”, we will also adjust the strategy parameters to lower the conversion probability.
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Target an average 15% annualized option premium, +/-5% in the short term following the lowered conversion probability target.
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Expiry for covered calls will not exceed 180 days.
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If no suitable covered call opportunities meet these parameters, suboptimal trades will not be forced until the right opportunities arise.
See recent quotes on a notional amount of $1,480,050, with premiums ranging between 13.2-19.4%:
2. Deploy Stablecoin Proceeds into Compound Lending Markets
All USDC proceeds from the option premiums and any COMP conversions will be deposited into Compound lending markets, earning additional yield via Compound-deposited stablecoin cTokens.
3. cUSDC Yield and Strategic Buybacks
Building on feedback from different delegates, we propose using any converted stablecoins from the COMP Yield Strategy to strategically defend the COMP price at key levels through cash-secured puts using Compound-deposited, yield-generating cUSDC, as deemed appropriate pending market conditions.
A cash-secured put strategy involves holding stablecoins while selling a put option on an underlying token (e.g., COMP), think a reverse covered call. Treasuries looking to conduct buybacks can use cash-secured puts at target price levels, committing to repurchasing tokens at a discounted price while earning option premiums along the way.
In other words, if a conversion from the covered call strategy occurs—say, for example, $1 million worth of COMP is sold at a 130% strike price for $1.3 million USDC—we deposit the USDC into Compound. If the COMP price needs to be defended (see the ‘Buyback Triggers’ section below), we use the yield-bearing Compound USDC as collateral to write cash-secured puts. This allows us to earn additional yield on yield while converting USDC back into COMP if the price falls below the put strike levels, thereby defending and acquiring COMP at favorable prices—eliminating any potential strategic overlap related to USDC accumulation. The bought-back COMP can then be used to rerun the covered call strategy, continuing the yield generation cycle for the Compound DAO.
We propose continuously monitoring market conditions using technical indicators (summarised below). If an attractive buyback opportunity is identified, the cTokens will be used as collateral to sell put options on COMP with:
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Strike prices between 80-100% of the spot price.
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Expiries of up to 90 days to optimize for stablecoin liquidity.
Buyback Triggers
Incorporating community feedback, we propose monitoring key indicators to objectively identify buyback opportunities:
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RSI-Based Trigger: If RSI (14-day) drops below 30, COMP is considered oversold, signaling a potential buyback opportunity.
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Moving Average Crossover (SMA-14 & SMA-50): A buyback signal is confirmed when SMA-14 crosses above SMA-50 after a downtrend.
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MACD Confirmation: If MACD crosses above its signal line, this reconfirms positive momentum and a potential buyback opportunity.
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Market & Earnings Multiples: Additional fundamental market dynamics and earnings multiples can be incorporated to refine buyback execution.
Below is an illustration of historical buyback signals based on these indicators:
Implementation and Execution
While the infrastructure setup of the proposed strategy will be fully detailed in a follow up on-chain proposal, this section outlines the implementation from a high level below.
Avantgarde have typically used a combination of Safe multisig roles & permissions (via the Zodiac Roles Modifier) for implementing bespoke treasury management strategies. These setups provide beneficial flexibility to fine-tune execution of the strategy, while still protecting the DAOs assets by setting permissions so that only specific pre-agreed actions on selected protocols can be performed.
We propose to keep the assets to be managed in a Safe multisig (referred to as the Avatar safe) owned by the Compound Governor contract, and add a separate 1-out-of-2 multisig (the Signer safe) managed by Avantgarde and Myso as a signer on the Avatar safe to execute transactions.
To facilitate efficient trading operations, we will use the Zodiac Roles Modifier to set permissions for the Signers. The value of Zodiac roles is that you can be super granular when it comes to what Signers are allowed to do, to ensure there’s nothing they can do that results in a loss. In this case, the Signer safe will only be able to perform these actions:
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Depositing in the USDC and COMP compound markets
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Taking quotes and withdrawing proceeds from MYSO V3 (“takeQuote” and “withdraw” actions on the MysoV3Router contract)
Strategy Execution
Execution of the options strategy will be done through MYSO v3, which eliminates the need for institutional trading firms to take custody of COMP tokens or rely on off-chain legal agreements. The entire process is decentralized, secure, and transparent, ensuring maximum returns while retaining full asset control.
MYSO Protocol Architecture
The protocol consists of two core smart contracts: the Router and the Escrow
Implementation Contract. These contracts are publicly available in the official MYSO V3
repository and have been thoroughly audited (see Omniscia Audit Report). Users only need to interact and approve the core Router contract, which manages all token transfers related to option writing, auction creation, bidding, exercising, borrowing, and fund withdrawals.
When a user writes an option and is matched with a trading firm:
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A segregated escrow smart contract instance is created, locking the underlying tokens for the option’s duration.
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The escrow contract mints an option token, which is sent to the trading firm upon match, ensuring atomic execution and eliminating counterparty risk.
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Upon match, the counterparty must automatically pay the premium to initiate the start. If the limit price is reached at maturity of the loan, the trading firm should pay the agreed strike price; otherwise, the coins automatically unlock after expiry, returning to the Gitcoin treasury, eliminating counterparty risk.
Reporting
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Quarterly Reports: Detailed written reports on the strategies performance and results.
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Community Call Updates: Monthly updates to the Compound community.
Compensation
15% on premiums only.