Fee Structure
Explore Gamma Options' fee system: fee distribution, spread and slippage insights. Understand costs and make informed trades.
Fee Distribution
Fees are collected anytime a trader makes a trade on Gamma Options. Unlike other AMMs, fees are always collected in $USD. The fee distribution involves three main entities:
1) traders - pay a fee when buying/selling options,
2) LPs - receive 80% share of fee,
3) Gamma Options - receive 20% share of fee.
It's essential to note that traders pay fees through the spread and slippage. This ensures transparency, as there are no concealed or additional costs (other than transaction fees, which are beyond the scope of this document). The final price, which the trader sees, already encapsulates the associated fees.
Spread
For every option market on Gamma, there exists a spread between the bid and ask prices, resembling an order book model. The spread on Gamma Options is calculated using the formula:
It's imperative to understand that the spread adjusts with changes in the ETH price. Additionally, the divisor "1000" in the formula can be modified through governance decisions.
Let's examine the following example: If ETH is priced at $1600, an option with a median price of $100 will have a bid of $98.4 and an ask of $101.6, resulting in a total spread of $3.2. A trader purchasing this option will pay $101.6 per unit, assuming zero slippage. This means the trader pays an amount higher than the median price, and this difference essentially serves as the fee.
In simpler terms, the fee is equivalent to half the spread.
Minimum Spread
The lower limit is fixed at 0.6% but can be adjusted through governance. Such a spread is commonly observed in option markets that are significantly in-the-money. A trader executing a purchase or sale in these markets will incur a 0.3% fee on the transaction.
Maximum Spread
The upper limit is 50%, with potential adjustments via governance. This spread is typical for option markets that are notably out-of-the-money. In these scenarios, traders will face a substantial 25% fee on their trades.
Slippage
Automated Market Makers (AMMs), including Gamma's vol-range AMM, inherently exhibit slippage. This slippage arises from the AMM's nature, where every trade impacts the price.
In scenarios where markets are less liquid, slippage can form a notable portion of the fee a trader might bear.
Let's look at another example: consider ETH priced at $1600 and an option with a median price of $100. The bid and ask prices are $98.4 and $101.6, respectively. A purchase of this option would cost $101.6 per unit. However, once slippage is considered, the average median price might shift to $101. Factoring in half the spread to this adjusted median price, the cost becomes $102.6 per unit.
Here, the fee breakdown includes $1 attributed to slippage and $1.6 due to the spread, summing up to a total fee of $2.6.
Example Trade
Slippage is also known as 'Price Impact', and trader opening a position on Gamma Options can see price impact before they execute a trade. Take a look at the image below:
The price impact for the given trade is -0.21%. If the trader finds the total premium acceptable, the trade can proceed. It's crucial for traders to always evaluate the total costs, including both slippage and spread, before finalizing a transaction.
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