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Glossary
This section is a helping hand in your journey to futures and options trading. We did our best to put it simply... As simply as possible.

# Black-Scholes model

The Black-Scholes model, also known as the Black-Scholes-Merton (BSM) model, is one of the most important concepts in modern financial theory. This mathematical equation estimates the theoretical value of derivatives other investment instruments, taking into account the impact of time and other risk factors. Developed in 1973, it is still regarded as one of the best ways for pricing an options contract.

# Collateral (Margin)

When trading derivative products, an investor gets exposure to leveraged products that allow for getting exposure to larger funds with less capital required. To cover potential risks and open a position the trader needs to have some balance on his margin account that will be used to keep the position open. This balance is called collateral, or margin.
When a trader has insufficient collateral to keep a leveraged trade open, liquidation takes place.
The collateral part is described in detail in the Futures section.

# Epoch

The epoch system is used to pay Trader incentive, Market-maker incentive and USDC staking rewards. One epoch is the period after which SPFI tokens are distributed among traders, market makers and USDC stakers. On Spin, one epoch lasts 14 days.

# Expiration date

A contract's expiration date is the last day you can trade that contract. For European-style options, this is also the day when the settlement takes place, such contracts can be exercised only at expiration.

# Funding rate

Funding rates are periodic payments to long or short traders based on the difference between the perpetual contract market and the spot price. Funding rates make the perpetual futures contract price close to the index price (average spot price across several exchanges).
• If the funding rate is positive – longs pay shorts.
• If negative – shorts pay longs.
When asset prices rise, the futures price is usually higher than the indicative price, which makes the financing rate positive, which attracts short traders and arbitrage traders who sell futures, buy the asset on the spot market and thus receive a risk-free profit.
The premium ratio is used to determine the funding rate. The more expensive (cheaper) is the mark price of the perpetual futures relative to the price of the oracle, the higher (lower) is the premium ratio.
$k_p = \frac{1}{N}\sum_{i=1}^{n} \frac{mP_i - oP_i}{oP_i} * 100\%$
kp – premium ratio mPi – mark price for the i period oPi – oracle price for the i period N - number of periods. In this case, the minute values are taken for 8 hours, i.e. N = 60 * 8 = 480
The protocol connects to the oracle at the time of calculating the funding rate, takes an array of the close prices of the underlying asset for each minute for the last 8 hours, calculates the mark price of the perpetual futures for the last 8 hours of trading with a period of 1 minute, and calculates the arithmetic average of the difference between each corresponding price in 8 hours. The final value is the premium ratio.
The funding rate is included in uPnL every 8 hours, traders pay and receive funding only if their position is open at the end of the funding period. The platform does not charge additional commissions from traders for paying or receiving a funding rate. The funding rate is calculated based on the excess of the market price (the price of the last trade) of the indicative price. The funding rate is added to or subtracted from the funds in the user's margin account.
A short-period example:
Time, UTC
10:01
10:02
10:03
10:04
10:05
10:06
10:07
BTC close price
34,550
34,600
34,602
34,764
34,654
34,599
34,575
BTC Perp mark price
34,550
34,615
34,612
34,753
34,620
34,560
34,550
Difference
0%
0.04%
0.03%
0%
-0.1%
-0.11%
-0.07%
-0.03%

# Index price

The protocol uses the Pyth Network as an oracle for on-chain information on asset prices. These quotes are used to determine the expiration price of futures and options on various assets. The information coming from the oracle does not take part in pricing but there is a double anonymous continuous auction mechanism based on CLOB (central limit order book).
The price from the oracle is used when calculating the funding rate.

# Indicative price

Closer to expiration, traders usually close most of the positions, the remaining open ones are calculated based on the indicative price as of the date and time of expiration.
$(iP) = ∑iPcm / 60$
iP – Indicative price iPcm – the closing price of each minute of trading according to the oracle from 02:00 to 03:00 UTC.
Expiration of futures contracts takes place on indicative price, with the exception of perpetual contracts.

# Leverage

Leverage is a trading mechanism investors can use to increase their exposure to some asset by allowing them to pay less than the full amount of the investment. To trade with leverage, you need to have enough collateral on your account.
Say, you have $10,000 and would like to open a position worth$30,000. Not an issue, you will have to trade with x3 leverage. But always take into account that every price movement will be multiplicated by 3 meaning that if the BTC price is $30K, and it drops by$1K, you will earn $3K if you hold a short (sell) position, or lose$3K if your position is long (buy).
Losses are always covered from the collateral, and when it becomes insufficient liquidation takes place.

# Liquidation

Liquidation happens when a trader has insufficient funds to keep a leveraged trade open. The larger is the leverage, the higher is the risk that the position will be liquidated as a result of a minor price movement, so traders need to be very careful when choosing the leverage.

# Margin ratio

The margin ratio is used to assess the risk of a protocol user's position.

# Mark price

To protect trading participants from manipulation, a mark price is used - this is the average price of trading on the exchange with built-in protection mechanisms against manipulations and oracle errors. Based on the Mark price, the collateral, the funding rate, and the liquidation price is estimated.
To form the Mark price of asset, 3 types of prices are used:
Index price - price asset from Pyth oracle
Index price 2 - price asset from Spin own oracle
Fair price - the average price between the weighted average price for the best $5000 deep ask orders and the weighted average price for the best$5000 deep bid orders.
• If there is not enough liquidity for Fair price formation, then Fair price = Index price + (last available Fair price - Index price on that moment)
• If Fair price > Index price for 2,5% or more, than: Fair price = Index price + 2.5%
• If Fair price < Index price for 2,5% or more, than: Fair price = Index price - 2.5%
• If Fair price differs from Index price for 2,5% or more and Index price differs from Index price 2 for 2,5% or more, than Spin uses Index price 2 instead of Index price
Mark price = EMA 30 sec (Fair price)

# Market Maker (MM)

Market Maker or MM is a trading participant who forms and maintains market liquidity. The market maker acts as the buyer and seller of the asset.
Market makers maintain liquidity on the exchange, providing protection against unreasonable, increased volatility. If a trader or a group of traders decides to conduct a price manipulation, then the market maker must provide the market with sufficient liquidity to absorb the increased demand.

When you buy a put or call option, you pay a premium for the right to trade at a set price at a predetermined time. The size of an option’s premium is influenced by three main factors: the price of the underlying asset, its level of volatility (or risk) and the option’s time to expiry.

# PNL & uPNL

PNL stands for profit and loss. PNL is constantly updated according to the position's underlying asset price movements.
Unrealised PNL is also called floating PNL is a reference PNL of a position. Traders may find a positive or negative unrealised PNL immediately after a price change in position's underlying asset. On Spin, it also includes funding.
Realised PNL is calculated at settlement (when the position is exercised).

# Settlement

On Spin, settlement takes place when the position is exercised. It settles both profits and losses to the trader's balance.

# Underlying asset

Underlying assets are the financial assets upon which a derivative's price is based. For example, if you trade Bitcoin futures, its underlying asset is Bitcoin.

# Vault

Vault on Spin is a decentralized analogue of a margin account. Funds deposited to the vault are used as collateral for new positions.