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Arbitrage Strategy
There are 4 main Arbitrage Strategies on AlphaX. For full details on the strategies: https://hackmd.io/6ooK2hUSRi6Ne3rkL287ig

Quick Glance on What You Can Do

When Is An Arbitrage Opportunity Available?

Arbitrage opportunities on AlphaX occur when there is a price deviation between a Strike Token’s market price (M) and the oracle price (O). Arbitrageurs can take advantage of the opportunity by simultaneously obtaining (whether by minting or buying) and discarding the assets (whether by redeeming or selling). Arbitrage helps ensure that market prices will not deviate substantially from oracle price for long periods of time.

How To Identify Arbitrage Opportunities

On AlphaX, users can easily identify price gaps by looking at Premium/ -Discount column on Market Page. Premium or discount numbers shown are derived from the price gap of M and O denominated by the oracle price (O). Generally, a higher Premium or Discount would result in a higher profits from arbitrage.

1. When either a Long or Short Strike Token price exceeds peg.

Opportunity: Market price > Oracle price
Arb Strategy:
  1. 1.
    Mint new Long & Short Strike Tokens
  2. 2.
    Sell the above-pegged token to gain instant profit from price difference.
Note: Click here to understand Mint & Redeem.
Scenario: When ETH price is at $4,000 and Long Token's market price > oracle price
Strike Tokens
ETH-3000 (LONG Token)
5850-ETH (SHORT Token)
Oracle Price
$1,000
$1,850
Market Price
$1,100
$1,800
Premium/ - Discount
10%
2.70%
Users do the following to instantly gain arbitrage profit:
  1. 1.
    Supply 2850 USDC (=1,000+1,850) to mint 1 ETH-3000 and 1 5850-ETH
  2. 2.
    Sell newly minted ETH-3000 for $1,100 earning $100 or 10% instant profit
Then, users are left with 1 newly minted 5850-ETH token which they could either:
  • Immediately sell for $1,800 then earn net profits of $50 (= 2,900- 2,850) or 1.75% from the whole transaction
  • (or) Hold 5850-ETH to gain short exposure to ETH, if he is bearish on ETH or want to use it as a hedging tool (learn more)
  • (or) Provide liquidity to 5850-ETH/USDC liquidity pool to earn rewards which will help lessen the short exposure

2. When either a Long or Short Strike Token price is below peg.

Opportunity: Market price < Oracle price
Arb Strategy:
  1. 1.
    Buy Long or Short Strike Tokens at a discounted price.
Scenario: When ETH price is at $4,000 and Long Token's market price < oracle price
Strike Tokens
ETH-3000 (LONG Token)
5850-ETH (SHORT Token)
Oracle Price
$1,000
$1,850
Market Price
$950
$1,900
Premium/ -Discount
-5.00%
2.70%
Users do the following to instantly gain arbitrage profit:
  1. 1.
    Buy 1 ETH-3000 for $950
Then, users are left with 1 ETH-3000 for $950 which they could either:
  • Hold ETH-3000 to gain long exposure to ETH, if he is bullish on ETH or want to use it as a hedging tool (learn more)
  • (or) Provide liquidity to ETH-3000/USDC liquidity pool to earn rewards which will help lessen the long exposure

3. When both Long and Short Strike Token prices exceed peg.

Opportunity: Market price > Oracle price
Arb Strategy:
  1. 1.
    Mint new Long & Short Strike Tokens
  2. 2.
    Sell the above-pegged token to gain instant profit from price difference.
Note: Click here to understand Mint & Redeem.
Scenario: When AVAX price is at $105 and Long and Short Token's market price > oracle price
Strike Tokens
AVAX-60.5 (LONG Token)
155-AVAX (SHORT Token)
Oracle Price
$44.50
$50.00
Market Price
$48.50
$60.00
Premium/ -Discount
8.99%
20.00%
Users do the following to instantly gain arbitrage profit:
  1. 1.
    Supply 94.50 USDC (=44.50+50.00) to mint 1 AVAX-60.5 and 1 155-AVAX
  2. 2.
    Sell both newly minted AVAX-60.5 for $48.50 and 155-AVAX for $108.5 (=48.5+60.00) to earn net profit of $14 (=108.50-94.50) or 14.81% from the whole transaction

4. When both Long and Short Strike Token prices are below peg.

Opportunity: Market price < Oracle price
Arb Strategy:
  1. 1.
    Buy Long and Short Strike Token from the market at a discount.
Scenario: When AVAX price is at $105 and Long and Short Token's market price < oracle price
Strike Tokens
$44.50
$50.00
Oracle Price
$40.50
$40.00
Market Price
-8.99%
-20.00%
Users do the following to instantly gain arbitrage profit:
  1. 1.
    Buy 1 AVAX-60.5 and 1 155-AVAX for $80.50 (=40.50+40.00)
  2. 2.
    Redeem 1 AVAX-60.5 and 1 155-AVAX immediately for $94.025 (=44.50+50.00-0.475) to earn net profit of $13.525 (=94.025-80.50) or 16.8% from the whole transaction
*Redeeming transaction fee: 0.5% of the total transaction value.
Last modified 10d ago