Neon Costing Model

How we handle premium or cost of buying a hedge

Premium is one of the factors in writing a hedge, along with:

• Premium or cost

• Risk-free interest rate

• Underlying asset value

• Strike price

• Time to expiration

Unlike other protocols, our hedging platform is built for OTC trading, so the premium is based on OTC market rates rather than the other listed factors.

Pricing Options

Call options and Put options typically carry a cost or premium set by the seller based on market trends, with no limitations on pricing in the OTC market—it's a willing buyer, willing seller arrangement. The cost is charged only in the paired currency of the underlying assets or tokens in the option. For instance, if VELA is paired with WETH, the option cost is always priced in WETH, the paired currency for VELA on DEX.

Cost is mandatory, In Options trading, Takers have to pay a cost directly to the Writer upon taking the deal and its not refundable no matter the outcome of the deal. This is the sellers minimum payoff no matter the outcome on settlement. To the Taker the cost is the maximum possible loss.

We also offer equity swaps, where the cost is treated as collateral. This is the only type of hedge where the cost is collateral and is locked in use during the deal.

Pricing Equity Swaps

Equity Swaps are the only type of hedges that have their own unique costing model.

For this tool, the cost is the money which the buyers has to pay to the seller in order to hold rights to exercise the hedge. The cost always have to be equal the collateral value put up by Writer, this is based on market prices using Uniswap TWAP oracles to value them in paired token.

The cost is locked in use together with the Writers collateral, and only released on settlement.