Volatility Algorithm

Every time a user buys, sells, or exercises an option, the volatility value is updated like this:

$$\sigma_t^2 \;=\; \lambda\,\sigma_{t-1}^2 \;+\; (1-\lambda)\,r_{t-1}^2$$

Where:

• r_{t-1} uses simple returns where r_{t-1}=P_{t-1}/P_{t-2} - 1
• P_t is the oracle price at time t
• lambda is the decay factor
• sigma is the volatility, calculated by taking the square root sqrt(sigma_t^2)