5. Pricing Logic

Band pricing is determined by the AMM.

The price of a band at any given strike is a function of the reserves available at that strike:

$$\mathbf{P_s = F(R_s)}$$

• s is strike expressed in relative (%) terms vs. perp mark price at entry, not absolute dollar terms, e.g., a call option with a strike at +25% means the strike is set 25% above the prevailing perp mark price when the position is opened.

• P_s is the price at strike s, expressed as a fraction of the perp, e.g. a call with a strike of +30% from the entry perp mark price might be priced at 0.6 — meaning its value is 60% of the whole long perp, because it captures only a ‘slice’ of the perp’s total payout.

• R_s is the reserves available at that strike

• F is the AMM’s pricing function.

Price impact of trades: trades at strike ‘s’ affects the reserves — and therefore the pricing — at strikes further out of the money than ‘s’.