What is the OptionBlitz Revenue Model & Liquidity Provider Rewards Structure?

On the OptionBlitz Platform Liquidity providers contribute to Liquidity Pool (LPool). Part of it is used as a resource to manufacture products sold. Each product is expected to bring profit, either as profit margin or via fees or both. Risk is limited via Collateral account or via ‘TotalRisk’ account. All this creates a link between risk and volume of products sold (expressed in notionals). From this we can estimate profitability.

To understand the link between profitability, notionals and risk profile of each product a number of product models were created. All of them assume simple Brownian motion, the one used in many models including the famous one named after F. Black and M. Scholes. Its ingredients are constant volatilities and Gaussian distribution of price increments. However, the volatility of the real market is stochastic. To cope with this problem, we make calculations for different volatility regimes and choose the most pessimistic estimates.

So, in short, we can say that given market conditions and adverse behaviour of customers (traders) we steer Optionblitz-portfolio risk within limits of available capital to generate healthy profits.

Summary of revenue sources structure is the following:

• Binaries products are sold with an embedded margin of an approximate level of 20% of potential Win. It is not guaranteed though, and depends on the relation between market conditions and customers behaviour. Asymmetry adjustment is charged to guarantee book delta-neutrality.
• Americans are sold at a transaction fee of 0.1% plus premium calculated with Black-Scholes using historical volatility. Asymmetry adjustment is also applied. Maturity or option exercise is for free.
• Turbos are sold and bought back at a transaction fee of 0.1%. Since turbos are perpetual, we have chosen to charge Funding Rate as a fee every period, except the first one, when a transaction fee is charged. Funding rate is an average of risk premiums calculated over all turbos in the book of the same underlying.

Liquidity pool is shared among all products. In the estimations we assume that some products will be more popular than the other and hence we assume this distribution of the capital:

A — Binary — 10% (in equal share between sub-products)

B — Classic Options (American & European) — 20%

C — Turbos — 70%

This distribution is indicative and may change. They depend on the market situation and client response.

Implementing all the above discussions, the model delivers the following:

Table items are:
Allocation is a proportion of total Capital allocated to a product set. 11% of Capital allocated to binaries is distributed evenly across all 5 products (roughly 2% each)

Notional/Capital factor for American says that every 1 USDC of capital corresponds to 80 USDC of Notional. Or equivalently, American option with Notional of 80 USDC will generate the risk at 1 USDC level. Similar meaning is applicable to other products

Profit margin is an add-on averaged across all 5 binary products: Simple Bet, One-Touch, No-Touch, Double-Touch, Double-No-Touch. In our American and Turbos we do not add any profit margin on top of historical volatility. However, it is a very gross assumption. Optionblitz sells options and has to stay at least at the level of the market, which is reflected by implied volatility. We estimate that today the IVol/HVol for ratio is about 1.16 for Bitcoin. This is in line with estimations for Equity, Commodity etc, where IVol consistently exceeds HVol by 10–20%. Hence, consider our profit estimations as pessimistic.

Fee rate is applied to Notional of American and Turbo products. No transaction cost is applied to any binary product

By assuming that OptionBlitz is able to attract 10M of the capital, Digital Options, American and turbos will receive 1.1, 1.8 and 7.1 M USDC of Capital, respectively. In our factored estimates these values are converted into Notional volume to be sold every day. From this we may find cash amount due profit margin and transaction fees.

These numbers are summarised in the table, where Total Profit includes revenues from profit margin and fees collected from transactions.

Finally, profit expectation is about 154 M of USDC. To remind, this amount is expected to be generated on 10 M of Liquidity provided. This is quite ambitious. However, we want to limit capital usage such that Optionblitz can “sustain the wind” during 10 days. This will reduce the capital to 52 M of USDC.

We can now study the APY returns of different investor categories according to pessimistic, target and optimistic outlooks.

The model above assumes 90% capital utilization per day which is equal to 9,000,000 USDC capital consumed. This is roughly equivalent to the sale of 4900 products per day assuming an average outlay between 150 and 250 USDC per product. Our target and optimistic returns forecasts add provision for volatility margin. We explained previously that implied volatility usually exceeds actual volatility by 10% to 20% so if we estimate conservatively 5% and 7% volatility margins on our outlooks, we can see how it influences our returns profiles.

Now you have an understanding of how Liquidity Providers are rewarded on THE OPTIONBLITZ platform, CLICK HERE to learn how to become an affiliate.