Cega launches Leveraged Option Vaults (LOV)

6 min readApr 13


LOV Summary

Today, we’re thrilled to announce “Leveraged Option Vaults” (LOVs) which is an innovation in DeFi options that introduces brand new capabilities using knowledge from traditional financial engineering.

The key benefit of LOVs for users is that it delivers magnified yields up to 5x higher returns via a leveraged options structured product. Instead of needing to source external liquidity for leverage, LOVs have embedded leverage from the notional deposited and from the structure that is traded. This is an elegant solution that solves problems of liquidity fragmentation typically found with DeFi protocols offering leverage where they require overcollateralization or a need to source a separate pool of capital to fund leveraged positions.

Higher APY through embedded leverage

LOV strategies generate magnified APYs for users via embedded leverage by entering users’ staked USDC into multiple baskets instead of one basket (the case with Pure Options vaults). By doing this, APY levels increase in a non-linear fashion approximately up to 5x the regular APY. See the table below for an overview of the three LOV strategies that are currently available for trading at launch.

APY quoted as of 4/4/2023

What are the technical details of Cega’s LOV structured product? First to recall, Cega’s standard “Pure Options Vault” trades a worst-of put basket with a 100% strike with a knock-in barrier at X%. Here’s a quick reminder of definitions:

  • Knock-In Barrier is a price level at which down-side appears. If you have a 50% KI barrier, it means “the loss of the put does not realize until the spot touches below 50%.
  • Worst-of Put Basket means there are 2 or more underlyings we are tracking (i.e. BTC, ETH) and whichever is performing lower than where it started gets used for pay-off calculations
  • As an example, the Cega “Starboard” vault says that “if neither BTC nor ETH fall below 50% in the next 27 days, depositors will receive 12% APY”

For the LOV structure, it is a worst-of put spread. If a user is Nx leveraged (e.g. 2x), they are simultaneously (1) short Nx the 100% strike put basket and (2) long Nx the [1-(1/N)] strike put.

LOV examples:

  • If 3x leveraged, ie same strikes but users are short 3x the ATM put (+3x the 66.66% strike put so that the overall payout is floored at 0)
  • If 5x leveraged, ie same strikes but users are short 5x the ATM put (+5x the 80% strike put so that the overall payout is floored at 0)

Depending on the difference in the option prices at 100% strike and [1-(1/N)] strike, the growth of APY is not linear. However, we are able to increase APY in a capital efficient strategy for our users to stake into. As a result, we are able to create APY levels of up to ~50% APY. For more information, see the appendix.

User Payoff Examples

It’s important to understand the different scenarios under which users can generate magnified LOV yield, and also understand the risks for magnified losses.

Please visit our documentation for extensive examples here: https://docs.cega.fi/cega/products/overview/leveraged-options-vaults-lov/payoff-scenarios

Risks and Mitigation

Cega vault strategies are sophisticated investment products that carry risks and are not suitable for investors who do not comprehend the product or are risk averse. Make sure to only stake into these products if you are aware and understanding of the risks.

Risks include:

(1) credit risk — if a market maker (MM) defaults, they may not pay the yield owed to depositors for the 27 day trade. However, there is no credit risk for the depositor’s invested capital because it is 100% collateralized on-chain and not engaged in lending. Cega has strong risk management practices including signing ISDA legal agreements with MMs, and choosing accredited MMs who pass KYC and who have a history of credit worthiness;

(2) principal at risk — if markets experience a significant downturn (eg. 50% decline) and crypto asset underlying prices exceed the knock-in barriers, investors may lose some portion of their initial investment;

(3) magnified loss upon knock-in — due to the leveraged position, an investor will face higher loss of principal at expiry if there was a knock-in event during the trade. The loss is magnified by the leveraged option level (e.g. 2x) and in total cannot exceed the amount of invested capital in the vault trade;

(4) smart contract risk — there is smart contract risk associated with depositing funds on-chain. To ensure security, Cega enlisted top firms to audit its code and has an ongoing retainer for new features. The Ethereum smart contract was double audited by Ottersec and Zellic. The Solana smart contract was audited by Ottersec and saw security consultation by Zellic during the development process.

Double Audited

Cega’s LOVs have been double audited to ensure code security. Cega audits were performed by OtterSec and Zellic, two of the top security auditors in the space. Post audit, no critical vulnerabilities were identified and all code security recommendations were implemented to further strengthen the codebase.

Ottersec audit: https://drive.google.com/file/d/1a0nYzQ41kZMFDxDDDOJua3V2UTK8v2jX/view?usp=sharing

Zellic audit: https://drive.google.com/file/d/1qcNiP-5vQpqUqo4WzlNT6gsjzKSd8IqZ/view

How to use LOVs

Video instructions


Please visit our medium post for more information: https://cegafi.medium.com/the-0-to-1-guide-to-cega-ethereum-d9eb68b8b2d2


Why does APY not scale linearly with the leverage?

When users deposit their funds into a, for example, 4x vault, they are essentially allowing their capital to be used to take a leveraged position. However, as the leverage multiplier increases beyond a certain level, the user stands to lose their entire principal if the position goes against them.

For example, with a 50% KI and 2x leverage, the user would lose their entire principal if the price of the asset falls below the liquidation price. As the leverage multiplier increases beyond this point, the gradient of the put line becomes steeper, meaning that the price of the asset would need to increase even more after hitting the liquidation price for the user to recover their losses.

Therefore, the plateau point in APY for a given product is largely driven by the availability of principal vs. the potential loss on KI. Additional increases in APY beyond this point are a function of the ability to recover post KI. If a user has conviction that the price will immediately recover after KI is hit, they may opt to take the highest possible APY and increase their recovery barrier. However, if they are not confident in a recovery scenario, they may opt for a lower leverage multiplier to reduce their potential losses.

Ultimately, a user’s decision-making process will depend on how much principal they are willing to risk and how confident they are in the asset’s price recovering after KI is hit. It’s important for users to understand the risks and potential rewards of different leverage levels before depositing their funds into a vault.

Historical analysis of knock-in probabilities by product

Data notes: Implied probability values dated as at 3/6/2023. Historical probability KI values analyzed ending on 3/6/2023 and for the duration listed (e.g. last 6 months).




Cega is building the next evolution in defi derivatives with the first protocol focused purely on exotic options.

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