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