Atlantic Liquidation Protection
A.K.A. Atlantic Insured Perps
- Traders can purchase Atlantic Puts to prevent liquidations on up to 10x leveraged long positions on $ETH
- Writers write puts with $USDC and select a maximum price they are willing to buy $ETH for while earning premiums
Leverage traders are at risk of liquidation (where collateral is lost and position automatically closed) if the price of their traded asset goes against their trade direction. The prospect of liquidation means that even if a trader is correct on a longer time-frame, short-term volatility may cause their position to be closed.
Liquidation protection prevents liquidation events from occurring, allowing traders to maintain their direction bias without needing to open a new position.
Dopex’s liquidation protection uses Atlantic Option logic to move $USDC collateral from purchased Atlantic Puts ("AP") into a trader’s margin account. This deleverages the traders position and brings their liquidation price close to zero (i.e. cannot be liquidated) while allowing them to maintain exposure with the same position size.
Atlantic Liquidation Protection ("ALP") is an integration with GMX, a perpetual exchange.
ALP writers deposit $USDC and select a Max Strike at which they are willing to provide liquidity for puts. The actual strike price to be used is determined at time of utilization by purchasers (i.e. leveraged traders), and can be any strike price below their chosen Max Strike.
Writers receive a standard short put payoff based on the strike price they are writing for. In addition, they receive interest for their collateral when borrowed to top up the purchaser’s margin account.
Providing liquidity for APs uses an algorithm known as Max Strikes. This defines the maximum strike price that the writer’s liquidity will be used for and can be seen as the maximum price they are willing to purchase the underlying ($ETH).
The Max Strikes concept has two main rules:
- 1.Max Strike must be equal to or lower than current spot price
- 2.Max Strike must be decrements of tick size
For example, assume the current spot price of $ETH is $1,500.
The chosen Max Strike must be equal to or lower than $1,500. Given a tick size of $100, possible Max Strikes include $1,500, $1,400, $1,300, etc.
Note that Max Strikes of, for example, $1,350 would satisfy Rule 1. (Max Strike </= Current Spot Price) but not Rule 2. (decrement of tick size) and thus would not be possible.
AP purchasers are traders that want to open a protected leverage long position on GMX via the Dopex ALP UI. The strike price they will purchase and the number of options to be purchased will depend on the trader’s position size and leverage amount. The higher the trader’s leverage, the higher the strike price required and the greater the position size the greater the number of options required.
The trader will pay an upfront premium in exchange for full liquidation protection. If the price of the longed asset decreases, their maximum risk exposure is their margin. If the price of the longed asset increases, their payoff is identical to the equivalent standard perp exposure less the value of premiums paid.
The difference between a protected and non-protected position is that even if margin reaches zero the trader’s position remains open, allowing them to maintain their bias in situations which would have caused liquidation.
When a user deposit margin and selects their leverage, this will output Position Size given by Margin * Leverage. The leverage amount will also determine their liquidation price with higher leverage equating to a higher liquidation price (i.e. smaller fluctuations required for liquidation).
These inputs are used to define the parameters of the Atlantic Puts that must be purchased for liquidation protection.
Specifically, it will select the trader’s:
- 1.Strike Price = Liquidation Price + Buffer
- 2.No. Options Purchased = Position Size - MarginStrike Price
For example, a trader with $1,500 in margin on 10x leverage would have a liquidation price of $1,350. The strike price of the APs they need to purchase would be $1,350 + a buffer amount - assuming the buffer rounds up to the nearest $100, they would purchase APs with a strike price of $1,400.
$1,500 margin at 10x leverage equates to a $15,000 position size. To determine the number of options to be purchased, we must first work out Position Size - Margin which is $13,500. Given they the strike price required is $1,400, the user would purchase 9.64 (13,500/1,400) $1,400 strike APs.