Oracle Papers
Launch

Section 07 / 12

Fees

Additive decomposition of the premium into a fair-value component accruing to the pool and a protocol spread.

Premium Decomposition

The premium quoted at issuance decomposes as

Premium=Vmodel+s,(1)\text{Premium} = V_{\text{model}} + s, \tag{1}

where VmodelV_{\text{model}} denotes the fair value produced by the pricing engine and ss the protocol spread. VmodelV_{\text{model}} accrues to the counterparty pool as compensation for writing the contract and reserving MM of collateral; ss is retained by the protocol.

Protocol Spread

The spread is an execution charge, orthogonal to the risk premium embedded in VmodelV_{\text{model}}. It:

  • is applied symmetrically at issuance and at early close;
  • is independent of terminal moneyness;
  • funds protocol operations and the Free Call Drops program;
  • is discounted for qualifying token holders, as specified in Holder Perks.

The spread schedule is set internally.

Round-Trip Cost

For a position opened at t0t_0 and closed early at t1t_1, the trader's net result is

PnLround-trip=(Vmodel(t1)−s)−(Vmodel(t0)+s)=ΔVmodel−2s,(2)\text{PnL}_{\text{round-trip}} = \big(V_{\text{model}}(t_1) - s\big) - \big(V_{\text{model}}(t_0) + s\big) = \Delta V_{\text{model}} - 2s, \tag{2}

so the spread is incurred on each leg. A position held to settlement incurs ss once, at issuance.