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Options AMM

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Options AMM

The general properties of the Options AMM

An options AMM implies a pool with USDC (or aUSDC) and options tokens (PodPuts or PodCalls). The options tokens can be bought or sold to the AMM pool, and the option price is known as premium. The Options AMM algorithmically calculates the premium, taking into account internal and external factors. The pools created in the options AMM will stop the trading functionality once the option enters the expiration window. It is possible to withdraw funds that were provided as liquidity at any time (before, during, or after expiration).

In detail, the Options AMM has the following properties:

Price discovery
The AMM algorithmically calculates premium

The algorithm accounts for the current spot price of the underlying asset (leveraging ChainLink's oracle), the time until expiration, the implied volatility (calculated as a weighted average between the trading activity and an internal IV oracle).

Single-sided liquidity provision
It is possible to add liquidity on one side of the pool, using only options tokens, stablecoins, or both. The pool will track the user's initial exposure and, by the time the user removes liquidity, the withdrawal position should reflect the initial exposure within a new distribution of assets. The new position will be composed of a new asset distribution (stable coins and option tokens), impermanent gain or loss (depending on the pool's return), and AMM fees. Note that the current UI requires liquidity provision of equal parts.

Inventory imbalance and price changes
If there is no inventory imbalance (meaning only canceling trades happened in the pool), price changes due to Black Scholes updated calculations should not represent a loss in value for liquidity providers.

Fair distribution on pool returns among liquidity providers
Pool returns should be distributed correctly across time and liquidity providers.

General derivatives price formulations use one or more data from the market (like the spot price of the underlying asset) to calculate a derivative price. Our model's price discovery mechanism uses external factors, combined with computed properties (such as time to expiration and risk-free rate) and internal factors (such as the Implied volatility), to calculate the current premium according to Black Scholes. For more details on pricing, check Pricing.

Last modified 4mo ago

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