Positions Payoff

Maximum P&L Framework for long positions

Long positions have theoretically unlimited upside potential, we will therefore initiate IVX markets with a framework for setting this maximum P&L in terms of observable market variables and a defined shared benefits between IVLP deposited and protocol traders. This framework involved calculating the maximum P&L as an implicit option long traders are selling to the IVLP and solving for the maximum P&L in terms of premium from there.

The four distinct trade types (defined from the perspective of a trader) with their respective maximum liabilities to the IVLP are:

• Long Call: Without a maximum P&L the potential IVLP liability is uncapped. With the maximum P&L parameter in place, the maximum P&L in percent is $Pmax_{longCall}$

• Long Put: Without a maximum P&L the potential IVLP liability is 100% of the reserved amount. With the maximum P&L parameter in place, the maximum P&L in percent is $Pmax_{longPut}$

• Short Call/Put: Without a maximum P&L the potential IVLP liability is the Premium percent of notional. With a maximum P&L in place this could be contained further, but there are some user experience issues to doing this.

By that:

• Long positions $P\&L_t = Min[\ Premium_t - Premium_0;  maxPNL(k)\ ]$$p(0)$

• Short position $P\&L_t =  Premium_0 - Premium_t$

and at expiry

• Expiry Pay off $P\&L = Min[maxPNL(k), (b/s) \times (Spot - Strike)], 0] - P(0)$

$maxPNL(k)$ is defined per strike price delta at the moment of opening the position

If users had opened positions by the time the epoch ends, their trades undergo the settlement process, in which they are not allowed to resume trading activity in the next epoch until the positions are closed, even if they were carried to the next epoch.

Impact of Maximum P&L Width on IVLP Risk and Return

The width of the maximum P&L affects the risk of the IVLP pool as this maximum P&L implicit option will offset some delta and gamma risk in the pool, where the tighter the maximum is set, the greater the offset on average.

The overall return of the pool is also increased as the value of this option will realize over time and over a long enough time horizon it will have the effect of an explicit trading fee. We are projecting this as a healthy dynamic balance between potential trader upside realtive to the risk absorbed by IVLP, and can be modified in the future acording to community and data feedback

E.g: The payoff for a long call position with a maximum P&L in place is shown in the diagram below.

Token Payoff:

Position	Position	Token Payoff
	Buy Call	Volatile Token
	Sell Call	Stablecoin
	Buy Put	Volatile Token
	Sell Put	Stablecoin

• Max PnL Rate: 720% for ETH BTC BERA