Option Pricing on Automated Market Maker Tokens

Option Pricing on Automated Market Maker Tokens

Option Pricing on Automated Market Maker Tokens Reveals Pricing Discrepancies

Swiss fintech and banking experts are taking note of a recent research study on the pricing of options on tokens traded on constant-product automated market makers (AMMs). The study, which analyzed the behavior of 90 Bittensor subnets, found that Black-Scholes, a widely used option pricing model, underprices 20%-out-of-the-money puts by approximately 6% in implied volatility terms at every pool depth.

Background & Context

Automated market makers (AMMs) have gained popularity in recent years due to their ability to provide liquidity to decentralized finance (DeFi) markets. These platforms use algorithms to set prices and facilitate trades, often without the need for traditional order books. The constant-product AMM model, in particular, has been widely adopted due to its simplicity and efficiency. However, the pricing of options on these tokens has remained a topic of debate among researchers and practitioners.

Impact on Swiss SMEs & Finance

The findings of this study have significant implications for Swiss SMEs and finance professionals involved in DeFi and fintech. The study's results suggest that the traditional Black-Scholes model may not be sufficient for pricing options on AMM tokens, particularly for out-of-the-money options. This discrepancy can have significant consequences for investors and traders, who may be exposed to unexpected losses or gains. As the DeFi market continues to grow, it is essential for Swiss financial institutions and fintech companies to develop a deeper understanding of the pricing dynamics of AMM tokens.

What to Watch

The study's authors recommend that market participants use liquidity-adjusted Greeks to accurately price options on AMM tokens. They also suggest that the weighting parameter of the pool, rather than pool depth, is the primary driver of the leverage effect and implied volatility skew. As the DeFi market continues to evolve, it will be essential to monitor the development of new pricing models and the adoption of liquidity-adjusted Greeks in the industry.

Source

Original Article: Option Pricing on Automated Market Maker Tokens

Published: March 31, 2026

Author: Philip Z. Maymin

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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult a licensed financial advisor before making investment decisions.