How Vanilla Works

This trading product is an innovative financial product developed by Vanilla. It allows users to profit from changes in the value of the target, using financial leverage, without bearing the risk of price fluctuations. The product's pricing is influenced by factors such as: the remaining settlement time, the target asset's price, and its price volatility.

1. Settlement Remaining Time (Time Value)

The longer the expiry time of the product, the more likely it is to reach the target price. Therefore, for products with the same target price, the longer the distance to the expiry time, the greater its time value, and therefore the price will be higher than products with a shorter distance to the expiry time.

Vanilla currently offers five settlement cycle products: 10 minutes (10m), 1 hour (1H), 24 hours (24H), 48 hours (48H), and 72 hours (72H). At expiration, a new expiry time product will be generated, and expired products will be settled for profit based on the expiry price.

2. Underlying Asset Price (Intrinsic Value)

The second factor affecting the price is the deviation degree of the underlying asset price and the settlement (execution) price.

After the user selects the product target price, when the latest price reaches the target price, it is in a profit state. The difference exceeding the target price determines the amount of profit.

And when the market's latest price is closer to the product's target price, this target price product is more likely to gain more profit at expiration, so the closer the product's sale price is to the current price, the more expensive it will be.

3. Price Volatility of the Underlying Asset

The third factor affecting pricing is the price volatility of the underlying asset. Volatility refers to the price fluctuation of the underlying asset in the spot market, and high volatility means a large price fluctuation range and greater risk for the holder of the underlying asset.

Volatility has a great impact on pricing. During periods of high volatility of the underlying asset, it is more likely to reach and exceed the target price in a short time, so when the product fluctuation becomes larger, the price of the product will also be higher.

4. Pricing Model

Based on the above three factors, the options market commonly uses the Black-Scholes option pricing model. Refer to the following core formula:

$C=SN(d1)-Xe^{-rt}(d2)$ $P=Xe^{-rt}N(-d2)-SN(-d1)$

• C is the price of a bullish product

• P is the price of a bearish product

• S is the current price of the underlying asset

• X is the settlement (execution) price

• t is the time to expiration

• r is the risk-free interest rate

• N() is the standard normal distribution function

• d1 and d2 are adjusted parameters, the specific calculation method is as follows:

  • $d1= \tfrac{ln\tfrac{S}{X} +(r+\tfrac{\sigma^2}{2})t}{\sigma\sqrt{t}}$

  • $d2=d1-\sigma\sqrt{t}$

• σ is the annualized volatility of the underlying asset