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Options Pricing and Oracles

💡 Pricing Options on Premia Blue

Learn about Premia Blue's model for pricing options and where Chainlink's Price Feeds come into play!

The On-Chain Options Pricing Challenge

Traditional options pricing, often utilizing models like Black-Scholes, relies on a plethora of market data which is easy to access in centralized finance. 

However, replicating this within DeFi is notably challenging due to the lack of readily available market data and the significant differences in market structures.

At the same time, pricing is paramount to a fully functional options exchange. Incorrect pricing can lead to significant losses for traders and can undermine the integrity and attractiveness of options trading.

Premia Blue solves the problem of options pricing with multiple answers; a combination of fully market-driven pricing with range orders and the RFQ network, and a consistent risk profile within the underwriter vaults.

Chainlink for Options: Having a robust price feed for underlying assets is mandatory for accurately calculating the price of an option!

How Premia Blue Prices Options

As mentioned above, Premia Blue introduces fully market-driven pricing for DeFi options, made possible by a fully-fledged on-chain options exchange.

Premia Blue takes market-driven pricing and brings it a step further. With the perfect combination of capital efficiency, novel systems, and clever architecture, Premia Blue acts as a fully-fledged on-chain options exchange, allowing premiums to converge to “true market price”.

The solution consists of multiple price feeds combined with underlying mechanisms such as vaults, OTC liquidity, partial collateralization, and linear pricing.

Options Pricing on Premia Blue is accurately market-driven by a clever combination of multiple price quote sources and supply/demand dynamics!

Pricing With Options Vaults & OTC Liquidity

Premia Blue integrates a sophisticated Request-For-Quote (RFQ) network directly to the base layer.

The quote network allows for Over-The-Counter (OTC) liquidity — direct trading between two parties — resulting in minimal fees and price impact for larger trades.

The result? Highly capital-efficient market-making for both passive and active users.

The RFQ network is deliberately built on Arbitrum Nova, taking advantage of the fast transactions and low fees to create a seamless order book-like experience.

Premia Blue: What you get is an exchange that behaves like a central-limit order book for options, all while reaping the benefits of a sophisticated, concentrated liquidity AMM.

Margin & Partial Collateralization

Partial collateralization opens the doors to greater liquidity in the market, leading to more efficiently priced assets.

The upcoming isolated (and later, portfolio) margin system steps in to fully collateralize option positions at the exchange layer, allowing sellers to provide only a portion of the collateral.

Even under the most extreme market conditions, this robust system maintains the solvency of the exchange and effectively eliminates counterparty risk.

Test Yourself!

What is Premia Blue's solution for on-chain options pricing?

  • A combination of accurate spot prices, a synthetic IVOL surface, and vaults.

  • The combination of Chainlink's Price Feeds, partial collateralization, the RFQ-network, options vaults, and range orders.

  • A carbon copy of the traditionally popular Black-Scholes options pricing model combined with synthetic assets.