Strike Selections and Expiration

Vault Cycle

The cash credit spread vault typically operates on a cycle that consists of three key periods:
  1. 1.
    Aggregation period: During this period, underlying liquidity is deposited into the vault over a period of 4 days. This liquidity is used to collateralize the credit call spread trades executed during the next phase.
  2. 2.
    Purchase period: This period lasts 10 days, during which buyers can purchase call spreads against the underlying liquidity, with prices quoted by the Arrow SVI Engine. The execution period is designed to enable efficient and transparent pricing for all parties involved.
  3. 3.
    Settlement step: At the expiration of the execution period, the settlement step is triggered by Chainlink Automation nodes. During this step, liabilities and premiums are aggregated, and the cycle is rolled over. Depositors can claim premiums, and buyers can claim settlement payments at any time after expiration.

Strike Selection:

At the start of the execution period, the strikes of the call credit spreads are selected in the following way
  1. 1.
    The short option strike is selected to be 10% above the spot price of the underlying at that snapshot in time
  2. 2.
    The long option strike is selected to be 30% above the spot price of the underlying at that time
To ensure that the CSOVs are executed smoothly and transparently, there are two off-chain components that play a crucial role:
  1. 1.
    settleVault() is called by a Chainlink Automation node after the expiration has passed. There is minor price risk, however, because the price can change after the expiration has passed and the automation nodes settle the vault one block after the expiration has passed. This ensures that the settlement is as decentralized as possible while keeping the settlement close to expiration and providing users with a fair and transparent settlement process.
  2. 2.
    buyOption() requires the user to make an API request that will compute the latest option price. Once the price has been calculated, Arrow can then verify the user's signature using the parameters passed to the function. This verification process ensures that all transactions are legitimate and transparent, giving users the confidence they need to participate in Arrow's CSOVs.