Premium Pricing

Option pricing typically relies on something call "Implied Volatility". This represents demand for options and is a constraint to being able to provide options for a broad range assets on chain.

To work around this we have implemented a function that determines the pricing based on the pool utilisation and the put/call ratio. Adjusting the pricing dynamically based on demand.

Demand Based Pricing

This solution achieves the goal of being able to provide options for a broad range of assets with deep liquidity pools.

Custom Price Functions

We know this isn't optimal for all market/strike price/period combinations so we designed the system such that anyone can permissionlessly create a pool with their own price function and configuration.

This allows for many selling strategies to coexist and compete while always offering the best price to the buyer. See Price Optimization.

Premium Fees

The premium for an option is the sum of a set of fees multiplied by the option size.

Each of the fees is described below as they are implemented in the default pricing function. Pools with custom pricing functions can use these in any way they choose. The premium is the sum of all the fees and that is what the buyer is offered:

Protocol fee

This is a flat percentage of the option size purchased, set by the protocol administrator & paid to the protocol. Currently set to be 0%.

Pool fee

This is a flat percentage of the option size purchased, set by the pool administrator and paid to the pool administrator.

Strike fee

Applies if you put your strike price “in the money” to pay for the difference in what the strike price is compared to the current price.

Period fee

Optyn allows options to be purchased with an expiry into the future. The longer the time to expiry the greater the period fee.

Balance / Utilisation fee

This represents the implied volatility. For the default function the balance / utilisation fee has two objectives:

  • optimise utilization by pricing options low initially and increase the price as demand increases

  • increase prices if the pool become unbalanced with too many puts or calls

The liquidity pool starts balanced and under utilized so prices start low. As utilisation increases the prices increase. Additionally if the pool becomes unbalanced(ratio of puts to calls) the price on one side or the increases.