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FEB 8, 2024

Introducing Price Locks by Tensor

by ChefGunny.sol

GM Solana-fam! In this thread I aim to explain the mechanics of Price Lock, how to use it, some possible trading strategies, and why this is bullish for both Tensor and the $SOL NFT space.

Purchasing a Price Lock - Going LONG

On this side of the market, we have the ‘takers’, who are purchasing the ‘option’ to either buy / sell at the price lock, within the 7 day period.
The price lock in this instance, is some price above the current floor price. You purchase the price lock, and pay a fee of at least 3.5% immediately, this is essentially the premium you pay to the price lock seller, and in return you now have the ‘option’ to purchase the NFT at your price lock at any time during the 7 days.
Should the floor price of the NFT move above your price lock, you can then exercise your price lock, either purchasing the NFT at the price lock value, or insta-selling it into the floor price, and taking the spread (Floor Price - Price Lock) as a profit.
Should the floor price of the NFT move below your price lock at the end of the 7 days, you only lose the initial fee of at least 3.5%.
Remember, as you are only paying for the ‘option’ to buy the NFT, there is no contractual obligation to actually purchase it.
Let’s use some numbers to illustrate a potential trade:
  1. The floor price of a ChefGunny NFT is 10 SOL, and I purchase a price lock at 11 SOL, paying a 5% fee of 0.55 SOL immediately.
  2. I now have exactly 7 days for the price to (hopefully) move above my price lock at 11 SOL.
  3. Three days later, the floor price moves to 15 SOL and I exercise my price lock, (the ‘option’) to buy the NFT at 11 SOL.
  4. I can either pay 11 SOL for the NFT, which is currently worth 15 SOL, or instantly sell the NFT into the collection bid, making a profit of 3.45 SOL. (15-(11+0.55) = 3.45)
  5. For this trade, my yield would be approximately 630% (3.45/0.55).
  6. Instead, suppose that after 7 days, the NFT floor price fell to 9 SOL, I would not exercise my price lock, but would still have paid the fee, resulting in a 0.55 SOL loss.
In this way, traders can access exposure to the potential upside of an NFT, without physically holding it, thus limiting downside risk to the initial fee.
Furthermore, price lock is much more capital efficient than purchasing the whole NFT for exposure to its upside. If in the example above you had bought the NFT in its entirety, your yield (Profit/Price) would be roughly 50% (5/10), as opposed to 630% (3.45/0.55) which is almost 13x.
Purchasing a Price Lock - Going LONG
Purchasing a Price Lock - Going LONG

Purchasing a Price Lock - Going SHORT

The price lock in this instance, is some price below the current floor price. You purchase the price lock, and pay a fee of at least 3.5% immediately, this is essentially the premium you pay to the price lock seller, and in return you now have the ‘option’ to sell the NFT at your price lock at any time during the 7 days.
In this case, should the floor price of the NFT move below your price lock, you can purchase at the lower market price, and then exercise your price lock above the market price, either selling the NFT at the price lock value, or if you do not own the NFT to sell, you can simply sell into the collection bid, and take the spread (Floor Price - Price Lock) as a profit.
Should the floor price of the NFT move above your lock price at the end of the 7 days, you only lose the initial fee of at least 3.5%.
Remember, as you are only paying for the ‘option’ to buy the NFT, there is no contractual obligation to actually purchase it.
Let’s use some numbers to illustrate a potential trade:
  1. The floor price of a ChefGunny NFT is 10 SOL, and I purchase a price lock at 8 SOL, paying a 5% fee of 0.40SOL immediately.
  2. I now have exactly 7 days for the price to (hopefully) move below my price lock at 8 SOL.
  3. Three days later, the floor price moves to 6 SOL and I exercise my price lock, (the ‘option’) to sell the NFT at 6 SOL.
  4. I can either now effectively buy the NFT for 6 SOL and then sell it for 8 SOL, or instantly sell the NFT into the collection bid, making a profit of 1.6 SOL. (8-(6+0.4) = 1.6) This is because I have bought the ‘option’ to sell at 8 SOL.
  5. For this trade, my yield would be approximately 400% (1.6/0.4).
  6. Suppose that after 7 days, the NFT floor price rose to 10 SOL, I would not exercise my price lock, but would still have paid the fee, resulting in a 0.40 SOL loss.
In this way, traders can access exposure to the potential downside of an NFT, without physically holding it, again limiting the trade risk to the initial fee.
This is a brilliant new product for $SOL NFTs, as traders can now hedge downside for an NFT; benefiting from the downward movement of a collection, without having to physically borrow an NFT over-the-counter.
Purchasing a Price Lock - Going SHORT
Purchasing a Price Lock - Going SHORT

Funding a Price Lock - LONG

On the other side of the market, we have the ‘makers’, those who are providing the ‘option’ to either buy / sell at the lock price, within the 7 day period.
The maker in this instance will supply their NFT at a price lock that ****they would be happy to sell at, above the current floor price. Should a ‘taker’ purchase the price lock, and decide to exercise their option to buy the NFT as the floor price moves above the price lock, you the ‘maker’ receive the value of the price lock, and the yield from the initial fee of at least 3.5%.
In the instance that after a taker purchases your price lock, and the floor price falls below the price lock after 7 days, the NFT is returned to you, alongside the yield from the initial fee.
Let’s use some numbers to illustrate a potential scenario:
  1. The current FP of a ChefGunny NFT is 10 SOL, and because I believe the FP is going to increase, I fund a LONG price lock at 12 SOL with my ChefGunny NFT (currently worth 10 SOL).
  2. A taker purchases my price lock at 12 SOL, and pays a 5% fee too (0.05 x 12 = 0.6 SOL). This is my yield at the end of the 7 day period, even if the price lock is exercised.
  3. The floor price moves to 14 SOL, and the taker exercises the option. You, the maker, are paid your lock price (12 SOL), and the yield of 0.6 SOL.
  4. Suppose the floor price fell below the lock price, after 7 days had transpired, the taker would not exercise the lock price, and both the NFT and the yield would return to you.
This is an ideal scenario should wish to earn a yield on your NFTs, whilst passively holding them.
However, it is important to note that there is much more risk to the downside as a maker, than as a taker, as the underlying NFT price could decrease substantially during the 7 day lock-up, which you are stuck with. That said, if you plan on holding the NFT for a long time, this is a great way to earn passive yield.
Funding a Price Lock - LONG
Funding a Price Lock - LONG

Funding a Price Lock - SHORT

The maker in this instance will supply their $SOL at a lock price that ****they would be happy to sell at, below the current floor price. Should a ‘taker’ purchase the price lock, and decide to exercise their option to sell the NFT, as the floor price moves below the price lock, you receive the NFT ****and the yield from the initial fee of at least 3.5%.
In the instance that after a taker purchases your price lock, and the floor price moves above the price lock after 7 days, the $SOL is returned to you, alongside the yield from the initial fee.
Let’s use some numbers to illustrate a potential scenario:
  1. The current FP of a ChefGunny NFT is 10 SOL, and because I believe the FP is going to decrease, I fund a SHORT price lock with 8 $SOL.
  2. A taker purchases my price lock at 8 $SOL, and pays a 5% fee too (0.05 x 8 = 0.4 $SOL). This is my yield at the end of the 7 day period, even if the price lock is exercised.
  3. The floor price moves to 6 $SOL, and the taker exercises the option. You, the maker, are paid the NFT, and the yield of 0.6 SOL.
  4. Suppose the floor price moved above the lock price, after 7 days had transpired, the taker would not exercise the lock price, and both the $SOL and the yield would return to you.
This is an ideal scenario should wish to buy up NFTs in your desired collection, whilst earning a yield at the same time.
Funding a Price Lock - SHORT
Funding a Price Lock - SHORT

Some Advanced Trading Strategies - Degen

Here I will detail a few possible scenarios where the price lock, introduced by Tensor, can open up very interesting NFT plays and scenarios.

Straddle - Speculating on Volatility

By simultaneously purchasing a LONG and a SHORT price lock, at small equal gaps between the floor price, a trader can realise outsized gains if the market price swings in either direction. This strategy benefits from a significant price movement, for example in the run up to a large announcement.

Iron Condor - A Directionally Neutral Bet

Should a trader believe that the FP of an NFT is unlikely to move in either direction, within the 7 day period, they could fund both LONG and SHORT price locks, keeping both the NFT and the $SOL in each case, whilst collecting in the yield. Funding price locks further away from the market price could help reduce risk, in other words, increasing the range in which the FP can fluctuate.

Strangle - A Straddle with Lower Risk

In similar light to the straddle, a trader purchases both LONG and SHORT price locks, at equal gaps between the current floor price, except this time the range between the two price locks is greater. In this way, a trader can still trade volatility, but with less risk, as the spread is now increased.

Closing Thoughts

It should be clear to you now the many new opportunities that Tensor’s price lock brings to the NFT ecosystem. With increased capital efficiency, new ways to trade volatility and hedge risk, this is a feature that should attract many more investors and degens to the Solana space.
If you haven’t tried it out already, I challenge you to experiment with the price locks, and maybe even try out one of the degen strategies I detailed above.
That’s all I have to share regarding Tensor for the time being, these are exciting times ahead! Thanks for reading! If you enjoyed this, drop a follow on X, Telegram and subscribe to my access pool to stay in the loop.
As always, stay safe and bullish,
ChefGunny.
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