Uniswap on steroids
A derivative option primitive based on Uniswap V3
Proving liquidity to create option instruments has been researched in TradFi since 1980s - [paper]
With the help of range orders and concentrated liquidity in Uniswap V3, these novel instruments could be used to create even sophisticated derivatives products.
The payoff curve for a covered call is very similar to providing concentrated liquidity near the strike price.
The seller of the covered call option - Alice, provides liquidity in the ETH-DAI pool of uniswap V3 consisting of only ether within one tick spacing of strike price and deposits the NFT as collateral into the contract.
Case 1: if the price of ETH is equal to or below the strike price ($1500) at time of expiry:
As the liquidity(ETH) is deployed at the strike price, the amount of ETH is unaffected as the current price is below strike price and the seller of the contract Alice gains a premium of 50$ as a yield.
Case 2: if the price of ETH is above the strike price ($1500) at time of expiry:
As soon as the price of ETH crosses the strike price $1500, the liquidity provided on the pool gets converted from 1 ETH to 1500 DAI and remains constant if the price stays above.
The 1500 DAI is split between Alice and Bob based on the expiration time and premium.
In this case Alice receives 1200$ for the collateral he provided, plus the 50$ premium - note that if Alice were just to hold his 1 ETH he would have 1500$. Bob receives 150 DAI (200 - 50 for the premium he paid earlier) as his assumption was correct for which he made a whooping 3x return!