Determining Strike Prices


The methodology presented is for stablecoins pegged to $1. In order to determine the strike prices, we analyzed a variety of datasets, each spanning over the past few years. Using the datasets for the stablecoin insurance vaults we are implementing, we calculated a variety of metrics to determine the appropriate strike prices and maturities for the low, medium, and high risk payouts.

Outlined is the process we took:

  1. Calculate the standard deviations for USDC, MIM, DAI, FRAX, and FEI

  2. Calculate the daily deviations from the mean ($1), excluding all outliers

  3. Calculate the frequency of breaking the variance threshold at various indicators (10bp, 20bp, 30bp, etc)

  4. Determine appropriate strike prices which align incentives from all interacting parties. This includes providing insureds appropriate protection, ensuring counterparties earn generous revenues, and protecting the protocol from mass liquidation events.

Determine strike prices

In the current framework, we assign three strikes to each stablecoin:

We assume price deviations from $1 are independent and identically distributed (i.i.d) random variables to determine the strike prices. Refer to our technical whitepaper to read more about the assumptions and statistical components.

Strike Price Formula:

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