Premium calculation

Liquidity providers generate yield from two separate sources: the premiums from the covered options they sell and the transactions fees collected from spot trading activity in the InfinityPools AMM. The premium for selling covered options is calculated by multiplying two numbers:

1. The first number is the minimum premium that liquidity providers get paid for selling a covered option. It is the output from a calculation similar to how the Black-Scholes equation is derived. However, as mentioned above, the InfinityPools equation is both computationally simpler and more price accurate than Black-Scholes.

2. The second number is called a utilization rate and is the output of a function that responds to supply and demand for leverage in the market. It allows the market to bid up the first number when there is additional demand or if there is an arbitrage opportunity.

Assuming the sum of the premiums (generated by selling covered options) and fees (generated by the spot AMM liquidity) adds up to $50 for a given duration, the payoff for a liquidity provider that deployed assets at 900 USD would look something like this:

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