> For the complete documentation index, see [llms.txt](https://docs.symm.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.symm.io/options-protocol-architecture/core-financial-concepts.md).

# Core Financial Concepts

### Options fundamentals

An option is a derivative contract that gives the buyer the right to buy or sell an underlying asset at a predetermined price (the *strike price*) by a set expiration date. The seller (the *writer*) is obligated to fulfil the contract if the buyer exercises.

**Option types:**

* **Call options:** the right to buy the underlying asset.
* **Put options:** the right to sell the underlying asset.

**Example:** A call option on 100 ETH with a $3,000 strike price gives the buyer the right to purchase 100 ETH at $3,000 by expiration. If ETH trades at $4,000 at expiration, the buyer's profit is:

```
profit = (4,000 - 3,000) × 100 = $100,000

```

#### Profit and loss (PnL)

PnL is the difference between the settlement (execution) price and the strike price:

* **Call options:** `PnL = (Settlement Price - Strike Price) × Quantity`
* **Put options:** `PnL = (Strike Price - Settlement Price) × Quantity`

The protocol settles balances between PartyA and PartyB from the calculated PnL, so the underlying assets never have to change hands.

### Collateral, liquidation, and solvency

A seller facing a large loss has an incentive to walk away from their obligation. Collateral guards against that: the seller must keep a minimum balance of a designated *collateral token* as a guarantee. For simpler accounting, Symmio uses that same collateral token to pay the option premium.

When a party falls below its collateral requirement, the [liquidation system](/options-protocol-architecture/technical-architecture/liquidation-system.md)

### Solvency requirements

#### PartyB solvency

#### PartyB must stay solvent against the *loss coverage rati*o, which sets the minimum collateral required relative to unrealized losses. With a 30% loss coverage ratio, for example, PartyB must hold collateral equal to 30% of its unrealized losses.

* **Effecti**v**e UPN**L`: effectiveUpnl = upnl > 0 ? upnl : (upnl * lossCoverage) / 1e18`
* <sup>Solvency check: balance + (effectiveUpnl \* 1e18) /</sup> collateralPrice ≥ 0

#### PartyA solvency

PartyA must hold enough *maintenance margin* to cover potential losses from its short positions when writing (selling) options.

Solvency check: (balance - totalMM) + (upnl \* 1e18) / collateralPrice ≥ 0, where totalMM is the total maintenance margin across all open positions.

### Protocol participants

#### PartyA (trader/user)

Initiates trading by creating and sending intents, and can be the buyer or the seller of an option. PartyA provides premium payments when buying, maintains maintenance margin when selling, and pays trading and affiliate fees.

#### PartyB (liquidity provider/market maker)

Responds to and fills trading intents, providing liquidity by taking the opposite side. PartyB must be whitelisted by PartyA to participate, and must maintain its solvency requirements.


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