Pricing, Hedging, Fees & Settlement Types
Last updated
Last updated
Each vaults owner/operator is responsible for setting and maintaining their own prices. Liquidity providers to a vault are responsible for hedging their own exposure.
Each vault exposes a pricing function which can be passed parameters such as the: strike, expiry, oracle, size etc. and then is expected to return what the fee is.
As it is an interface different implementations can be experimented with and can be customized for specific use cases.
A default function has been implemented( SimpleSeller) that allows the seller to set the price points across a pricing surface for an asset and it will return the price that is closest to those points.
A buyer can choose anywhere within this surface. It doesn’t need to be predetermined/predefined strike/expiry combinations.
The pricing function requests from the vaults what the fee is for a given strike/expiry etc.
The SimpleSeller contract is a default implementation of the price function. It can be used to set the price points across the strike/expiry surface for an oracle & direction
The grid of strikes, expiries and corresponding fees is then used to determine the price to apply for the extrinsic value.
This is an example of what can be applied for call on a single oracle.
Expiry time: The unix ticks from now
Strike: Unlike in the image the strikes are represented as the % relative distance from the current price. eg.
At The Money: Has a strike of 0
Out of the Money: A strike of 10000 would be double the current price
In the Money: A strike of -5000 would be half the current price
The intrinsic price is calculated automatically in the contract to represent the value that it would be if it was immediately exercised. For example 1 BTC at 50% in the money would have an intrinsic fee of 0.5 BTC. The extrinsic fee would be whatever has been configured on the price surface.
One of the unique characteristics of the Optix architecture is that its possible to have a single vault provide collateral for multiple oracle on both the put & call side.
This solves the problem of liquidity fragmentation and provides the ability to offer deep & liquid option markets on any asset.
As an example here a single vault can make markets on from deep in the money to far out of the money, on puts & call for 3 assets.
If the collateral asset used is USD then the options are "cash settled". The payout diagrams for both puts & calls are the same as "physically settled" except that the maximum payout is the options size. If the collateral asset is the same as the oracle. (eg. WBTC & BTC-USD) then it is a physically settled option.
When an option is purchased the following fees are included in the price offered:
Protocol fee - 1% of notional value, transferred to the protocol
Referral fee - 0.5% of notional value, transferred to the referrer
Vault fee - determined by vault operator, transferred to the vault operator
It will be possible to reduce the fees by staking the OPTIX token when it is launched.
