# Core Financial Concepts

## Options Fundamentals

Options are derivative contracts that give the buyer the right to buy or sell a specific underlying asset at a predetermined price (the **strike price**) by a specific expiration date. The seller (or **writer**) of the option is obligated to fulfill the contract if the buyer chooses to exercise their right.

**Option Types:**

* **Call Options**: Grant the right to buy the underlying asset
* **Put Options**: Grant the right to sell the underlying asset

**Example:** A 100 ETH call option 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 in spot market at expiration, the buyer's profit would be (4,000 - 3,000) × 100 = $100,000.

**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 the expiration date. If ETH is trading at $4,000 in the spot market at expiration, the buyer’s profit would be:

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

**Option Styles:**

* **European Options**: Can only be exercised at expiration (currently supported)
* **American Options**: Can be exercised at any time before expiration (not supported yet)

### Profit and Loss (PnL) Calculation

PnL is determined by 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 automatically settles balances between Party A and Party B based on the calculated PnL. This mechanism eliminates the need to transfer the actual underlying assets.

## Collateral, Liquidation and Solvency

In options trading, the seller may be incentivized to default on their obligations when facing significant losses. To mitigate this risk, collateral-based mechanisms are used to ensure the seller’s financial commitment. Under this system, the seller is required to maintain a minimum balance of a designated token—referred to as the **collateral token**—as a guarantee.

For simplified accounting, **Symmio** uses the same collateral token to pay the option premium.

When a party fails to meet collateral requirements, the **liquidation system** is triggered. Symmio implements a comprehensive liquidation mechanism to manage counterparty risk and maintain protocol stability.

## Solvency Requirements

### **Party B Solvency**

Party B must maintain solvency based on the **loss coverage ratio**, which defines the minimum collateral required relative to unrealized losses.

* The **loss coverage ratio** sets the collateralization level required for Party B’s unrealized losses.
* **Example**: With a 30% loss coverage ratio, Party B must maintain collateral equal to 30% of their unrealized losses.
* **Effective UPNL calculation**:

  `effectiveUpnl = upnl > 0 ? upnl : (upnl * lossCoverage) / 1e18`
* **Solvency check**:

  `balance + (effectiveUpnl * 1e18) / collateralPrice >= 0`

### **Party A Solvency**

Party A is required to maintain sufficient **maintenance margin** when writing (selling) options.

* The maintenance margin must cover potential losses from Party A’s short positions.
* **Solvency check**:

  `(balance - totalMM) + (upnl * 1e18) / collateralPrice >= 0`

  where `totalMM` represents the total maintenance margin across all open positions.

## Protocol Participants

### Party A (Trader/User)

* Initiates trading by creating and sending intents
* Can act as buyer or seller of options
* Responsible for:
  * Providing premium payments (when buying)
  * Maintaining maintenance margin (when selling)
  * Paying trading and affiliate fees

### Party B (Liquidity Provider/Market Maker)

* Responds to and fulfils trading intents
* Provides liquidity by taking opposite positions
* Must be whitelisted by Party A to participate
* Responsible for maintaining solvency requirements