How Does a Price Feed Error Impact an Options Contract’s Automatic Exercise?
Many decentralized options contracts use an automated process to exercise options that are 'in-the-money' at expiration. If the oracle provides an erroneous price feed at the moment of expiration, an option that should have been profitable might be incorrectly deemed 'out-of-the-money' and allowed to expire worthless, or vice versa.
This error directly leads to an unfair and incorrect settlement for the option holder.
Glossar
Price Feed
Feed ⎊ A price feed is a continuous stream of real-time pricing data from various sources used to determine the fair value of an asset.
Error
Detection ⎊ An error within cryptocurrency, options, or derivatives trading frequently manifests as a discrepancy between expected and actual execution prices, or a failure in order routing logic.
Price Feed Error
Discrepancy ⎊ A price feed error within cryptocurrency, options, and derivatives markets denotes a misalignment between the reported market price of an asset and its prevailing value across legitimate exchanges or oracles.