In order to create an options market for a given token pair, a valid oracle must be available to determine the value of an option (based on spot price) at expiration. Premia v3 pools can be established out-of-the-box with Chainlink VWAP Price feeds or Uniswap v3 TWAP Price feeds. Additionally, any Price Oracle implementing the IOracleAdapter interface can be used to initialize a new option pool.
By default, options will be automatically settled by an address maintained by the protocol, but Option holders can at any time designate an autoSettleAddress and an autoMaxSettleFee. Once set, the autoSettleAddress can exercise or settle options for the user after expiration, and be given a credit to compensate for the gas fees associated with making the call.
For convenience a keeper bot is then used to hydrate each pool with its corresponding settlement price if the option has expired. However, this value can also be populated within each pool by any user who calls the exercise or settle functions.
Chainlink has many available feeds which can be found here. If a direct pair is not available when a pair is upserted to the ChainlinkAdapter, an attempt will be made to combine multiple price paths to create a valid price feed.
To initialize a pool, Chainlink is queried with the selected pair, and if a valid market exists, a VWAP price is returned to help determine the initializationFee.
Ideally, the settlement price of any option would be determined by the spot price that corresponds exactly to 8AM UTC. If a price is not available at this timestamp, there are several actions that are taken to determine the most appropriate price:
- A valid price nearest to 8AM UTC on the expiration date is queried. This may end up being before 8AM UTC or after 8AM UTC, whichever is closest.
- If the last valid price is more than 25 hrs before the expiration timestamp, it will revert. This will happen for up to 12 hrs after the expiration timestamp.
- If expiration has happened more than 12 hrs ago, the last price prior to the expiration is used regardless of the timestamp (it will be more than 25 hrs prior to expiration).
{% hint style="info" %} While it is not expected to be a common occurrence to delay settlement by up to 12 hours, price feed or liquidity issues can happen. {% endhint %}
Uniswap v3 pools can act like a time-weighted average price (TWAP) oracle for a given pair. This opens up the possibility for additional spot markets that may not be feasible with Chainlink oracles alone.
{% hint style="info" %} Caution must be taken by users who choose to trade markets with Uniswap v3 TWAPS as there are limited guardrails to prevent market price manipulation in Uniswap pools for less liquidity spot markets. {% endhint %}
To initialize an option pool using the IUniswapV3Adapter, Uniswap is queried with the selected pair, and if a valid market exists, a 10-minute TWAP is returned to help determine the initializationFee that can be queried ahead of time in the IPoolFactory interface.
A time-weighted average price is provided through two functions, quote and quoteFrom, the TWAP period is by default 10 minutes. quote provides the TWAP using the latest observation. An observation is a recording of the pool state at a given block, it is updated after a swap is performed, if an observation for the current block has not been made. All pools must meet the required cardinality. This simply means that there must be enough observations to calculate a TWAP over a 10 minute period. quoteFrom adds an additional parameter, target. The target is the starting point from which the TWAP is calculated. For example, a target of 8:00AM UTC and a TWAP period of 10 minutes means that the TWAP is calculated from 7:50AM UTC to 8:00AM UTC.
The price for both functions is derived from aggregating the arithmetic mean tick and harmonic mean liquidity across active fee tiers, then calculate a weighted arithmetic mean tick. To learn more details about how Uniswap Price Oracles work, the Uniswap v3 Handbook is a great place to start.
{% hint style="info" %}
It is also worth noting that Premia v3 option markets utilizing the UniswapAdapter require a Uniswap v3 pool on Arbitrum, since Arbitrum is the location of all option settlement for the protocol.
{% endhint %}
Premia v3 will utilize a 10 minute TWAP window to determine prices that originate from Uniswap v3. For options that expire at 8AM UTC, we will use the TWAP from 750AM UTC to 800AM UTC on the corresponding expiration date.
If a TWAP is not available for this timestamp range, there are a couple actions that are taken to determine the most appropriate price:
- A valid price prior to 750AM UTC is returned by Uniswap.
- If the oldest observation available is after expiration, we will set the 10 min TWAP using the oldest observation.
Any price feed that implements the IOracleAdapter smart contract interface can be used to initialize a new pool. However, only well-established price feeds will be shown directly to users on the Premia Interface or using the Premia v3 SDK.
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Pending a change to amberdata instead of Deribit
- ESSVI → model derived from Deribit data (subject to change)
- Used for → Underwriter Vault & Margin Vault
- Updates → every minute