【Hardcore】THEO(Theoretical Prices)

Intro(Traditional Finance)

Options pricing model generates theoretical values (the values are differed by models, while commonly referred to as "theos") that vary between market participants.

The trade execution price is where theoretical value meets real value, as the best liquid bid and offer in the order books represent the prices that can actually be traded, determining the real value of risk that transfers from one participant account to another.

The fundamental goal of the options market maker is to consistently buy options below their theo values and sell options above their theo values, accruing theoretical edge in the options portfolio.

With sufficient trade volume (market liquidity) and proper risk management, accrued theoretical edge can become realized profits as positions are closed through trading and/or contract expiration. The best market makers are extremely successful at converting theoretical edge to realized profits while reducing the overall risk of the options portfolio.

Decentralized Options

Pain points

Liquidity consistency issues

Capital inefficiency

Prohibitive fee structures

High latency(?)

Soluiton

Network

Hxro Network is building THEO on Solana, a blockchain network that supports high performance with low fees.

Solana can process 50,000 transactions per second with 400 millisecond block times (with potential for sub-200 millisecond block times in the future). Fees on the Solana network are extremely low, making high transaction volume applications possible without the need for layer two solutions.【Fine I will leave it here, sounds like an ad, while all those benifits are true, 】

Pain-point 1: Liquidity【Collab with Serum】

THEO protocol addresses the liquidity consistency problem with a hybrid AMM / Order Book (via Serum) design for standardized cash-settled european call and put options.

These standardized contracts enable simpler cross-exchange arbitrage, which greatly improves price competitiveness and overall liquidity.

THEO protocol is designed to manage the mint/burn, valuation, collateralization, settlement, and liquidation of derivatives with a variety of settlement specifications.

Benifits

Participants in liquidity pools earn a significant share of all trading fees & share in additional pool-specific reward distributions. More capital, THEO AMM’s options markets become deeper and more competitive.

THEO Automated Market Maker (AMM)

THEO AMM has dynamic pricing and quote sizing to balance return on capital with risk, THEO AMM streams automated two-sided price quotes to the order books.

THEO value is based on different risk factors:

$$ in the LP

the portfolio inventory of the LP

the volatility

state of liquidity in the options market

underlying market

Risk control - Delta hedge

THEO uses automated delta-hedging with the underlying asset to manage the directional risk of the LP.

Ex:

If price of stock up for $x, $ put option then goes down by delta%x. If you have put for 100 shares of stock, you need to own 100* delta to hedge, which remains “delta-neutral.”

If THEO sells 10 BTC calls that have a 50-delta(50%), it will buy 5 BTC in the futures or spot market to hedge the directional risk of the options trade.

As the price of the underlying asset changes over time, THEO continues to manage the overall directional risk of the portfolio by hedging residual deltas from open positions.

Network Liquidity Incentive

Market maker provides liquidity, which incentivized with various monetary rewards, including fee discounts, maker/taker rebates, and lucrative volume-based rebates. This creates a positive feedback loop where more market participants transact.

So, in HXRO, All network trading fees flow to staked HXRO token holders. All transaction fees are shared among stakeholders, with 10% going to the Hxro Network treasury

Stakeholders (4 parties)

The market taker (hedger and/or speculator). Takers that stake HXRO benefit from reduced transaction fees and a share in network transaction fees

Liquidity Pool participant

SP(Surface Provider) - nodes that provide theoretical prices (real-time theoretical volatility surface) values to the network, incentivized by earning a portion of the trading fees

GT(Governance Token Holders) - voting rights

Challenges

Click the link below, its kinda beyond my major, needa more time.

Bibliography:

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https://docs.hxro.network/liquidity-protocols/theo-protocol⁠

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