# Black-Scholes Pricing

Rather than using an Automated Market Maker to determine the price of an option, Night uses order flow to calculate the Implied Volatility (IV) input for the Black-Scholes equation.&#x20;

For a full mathematical treatment describing how this is achieved read the Night Paper.

The volatility mechanism employed here is very similar in concept to the[ Lyra project](https://docs.lyra.finance/mechanism-overview/black-scholes-pricing-layer).&#x20;

Unlike Lyra, Night does not rely on user locked funds in LP pools but rather adjusts the Nmoney token payoff to achieve a similar result.&#x20;

This limits the risk to user funds, allows for greater flexibility with game theory and eliminates reliance on LPs. Additionally, there are **no platform fees**, as there are no LPs collecting rents.

### Initialization

The Night algorithm stores the volatility for the underlying asset on chain. It then uses historical volatility to determine the initial Implied Volatility (IV) at the time the bet is placed.

### Adjusting Implied Volatility

When a trade is opened for a specific contract length, the Algorithm determines how large the trade is in terms of Standard Sizes. It then updates the Baseline IV
