⛩️Strike-Bound Liquidity
The Strike Bound Liquidity mechanism is a sophisticated algorithmic component of the Yield Harbour protocol, designed to optimize liquidity concentration around discrete strike prices, thereby ensuring a robust and efficient market for traders.
Calculation Process
The mechanism leverages historical volatility data and confidence intervals to calculate strike prices, which are adjusted based on market conditions and risk tolerance. The calculation process involves the following steps:
Historical Pricing Data Capture: The protocol captures and stores periodic pricing data for the underlying asset from an on-chain oracle.
Historical Volatility Calculation: Using the captured historical pricing data, the protocol calculates the realized historical volatility of the underlying asset over a specified time period.
Confidence Interval Selection: Confidence intervals are selected based on market conditions and risk tolerance, with the standard deviation of the underlying asset serving as a proxy for risk.
Strike Price Calculation: Strike prices are calculated by combining historical volatility and confidence intervals, using a standard normal distribution to generate a probabilistic range of potential strike prices.
This approach ensures that the strike price determination process is based on actual historical pricing data, rather than relying on predefined formulas or models to estimate volatility. By capturing and utilizing the realized historical volatility, the protocol can provide more accurate and responsive strike price calculations, reflecting the true market conditions and price movements of the underlying asset.
The mechanism utilizes the historical volatility and confidence intervals to generate strike prices based on a standard normal distribution, with the spot price serving as the mean. The upper and lower strike prices are generated by:
Adding the standard deviation (confidence interval) to the spot price to generate the upper strike price (S + σ)
Subtracting the standard deviation (confidence interval) from the spot price to generate the lower strike price (S - σ)
Benefits
The resulting strike prices are selected to optimize liquidity concentration, providing traders with:
Improved market efficiency
Enhanced trading experience
Reduced need for manual order book management
Market Efficiency
By incorporating historical volatility and confidence intervals, the Strike Bound Liquidity mechanism improves market efficiency by:
Reducing the need for manual intervention
Enhancing the overall trading experience
Optimizing liquidity concentration around discrete strike prices
Additionally, the automatic generation of strike prices based on on-chain data and predefined algorithms significantly reduces the centralization risk associated with traditional options markets, where strike prices are often determined by a central authority. This decentralized approach ensures that strike price determination is transparent, immutable, and free from potential manipulation or censorship, aligning with the core principles of decentralized finance.
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