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Trading Parameters

We have put measures in place to mitigate the effects of any outliers and create a more stable payout structure that also promotes market diversification. When trading options on Buffer, there are a number of key parameters to keep in mind. Specifically, these are:

Trade Limiting Parameters:​

Max Trade Amount​

The option size a user buys depends on the pool’s available liquidity. Currently, the maximum liquidity utilization rate is capped at 40%. There is also a maximum utilization rate per asset per direction up/down, which is currently capped at 2% to 3% (depending on the asset pair).

AssetMax OI (ARB)Max OI (USDC)
BTC/USD20002000
ETH/USD20002000
GBP/USD20002000
EUR/USD20002000
XAU/USD10001000
XAG/USD10001000
LINK/USD500500
SOL/USD500500
ARB/USD500500
BNB/USD500500
XRP/USD500500
TON/USD500500
DOGE/USD500500
USD/CAD10001000
NZD/USD10001000
USD/SGD10001000
USD/CHF10001000
AUD/USD10001000

Max Trade Size​

In a single trade, a user can trade at most 0.25% of the pool’s available liquidity. In case the user tries trading for a greater amount of their partial fill is allowed, then the trade is opened for the max possible values; otherwise, the user is refunded.

AssetMax Trade Size (ARB)Max Trade Size (USDC)Min Trade Size (ARB)Min Trade Size (USDC)
BTC/USD10010011
ETH/USD10010011
GBP/USD10010011
EUR/USD10010011
XAU/USD10010011
XAG/USD10010011
LINK/USD505011
SOL/USD505011
ARB/USD505011
BNB/USD505011
XRP/USD505011
TON/USD505011
DOGE/USD505011
USD/CAD505011
NZD/USD505011
USD/SGD505011
USD/CHF505011
AUD/USD505011

Pricing Parameters:​

Dynamic Fees​

Buffer charges Trading Fees on the traders' position size. Buffer employs a "Dynamic Pricing" mechanism to incentivize or penalize traders, with the aim of maintaining balance in the Open Interest (OI) across various markets and promoting diversification among traders. Learn more about dynamic fees.

Dynamic Spread​

When you place simple Up/Down orders on, Buffer includes a spread in to the strike price. The price impact will be specific for each pair, and will also be different on each side (Up/Down). Hence, the opening price for an option slightly exceeds the current price for "Up" option and slightly undershoots it for "Down" options. On Buffer Spread is designed to trail higher when the markets are volatile. This parameter adds a position expectancy to the platform, thereby improving the possible outcome for LPs/

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Spread is never applied when closing a trade

Calculation:​

Spread as a function of implied volatility (iv) proxied as historical volatility (hv) and open interest (oi) - scales linearly from the lowest value i.e. 0.4 bp at 2.5% hv to 0.8 bp at 16% hv.

Then this lowest value of spread increased linearly to 1.5 (spread factor) times the lowest value as utilization of that market increases.

The formula is as follows:

spread=(m⋅hv+c)⋅(1+spreadFactor⋅totalMarketOImaxOI)\text{spread} = (\text{m} \cdot \text{hv} + \text{c}) \cdot \left(1 + \text{spreadFactor} \cdot \frac{\text{totalMarketOI}}{\text{maxOI}}\right)

Where:

  • m is the rate change of spread with historical volatility
m=0.8−0.40.16−0.025 m = \frac{{0.8 - 0.4}}{{0.16 - 0.025}}
  • c is the base spread at minimum volatility
c=0.4−(m⋅0.025) c = 0.4 - (m \cdot 0.025)
  • hv is the historical volatility

  • spreadFactor is the factor by which the spread is adjusted based on market utilization.

  • totalMarketOI is the total open interest in the market.

  • maxOI is the maximum open interest allowed in the market.

It means the open price of all trades will still follow the strike price of the pair, but depending on the open interest on the pair it will be higher (Up) or lower (Down).

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Buffer uses a historical volatility as a proxy for implied volatility. Historical Volatility calculated using garman-klass from the OHLC data obtained from Pyth. The hv values are continuously monitored for all the markets. These values are edited on-chain if the new values are 10% different from the values set in the contracts.

Advanced Settings:​

Partial Fill​

Partial fill is an advanced setting that opens a trade using the max possible value within the implemented max trade size limit. If the user tries to buy trade for more than what the pool allows then the contract will place a trade for the maximum possible value and refunds the rest of the fees back to the user.

Slippage​

On Buffer, slippage is used as the accepted price movement between when the user initiates the trade and when the trade is actually opened.