Trade Collateralization

Trade Collateralization Requirements

All orders must be fully collateralized. The Ithaca matching engine will reject any new order or any updates to existing live orders if the funds required to cover the trade premium or the collateral are not available within the user's FundLock Contract cash balances at the time of order submission or update.

Option buyers have to fully fund the limit price of an order for the premium to be paid.

Option sellers have to provide funds as collateral that match the maximum liability of the option that they are trying to sell. The asset to be provided as collateral depends on the exact order that is being submitted.

If a user withdraws funds from the FundLock smart contract that would render balances available below the level required to collateralize all of their outstanding live orders, the protocol will automatically cancel live orders until the available funds match the collateral and premium requirements of the remaining live orders.

When the Ithaca Matching Engine (IME) executes a trade, option contract buyers pay the premium in USDC, option contract sellers receive that premium.

Option contract sellers also have to provide the required trade collateral amount in collateral currency for the option contract they sold. The trade collateral amount is locked up in the FundLock smart contract for the duration of the trade until the traded contract is exercised.

The following steps are used to calculate the trade collateral amount:

Step 1 - Calculate Base Collateral Amount

Product Type	Collateral
Vanilla Call Option	1 Underlying Asset
Vanilla Put Option	Strike
Call Spread Option	Upper Strike minus Lower Strike
Put Spread Option	Upper Strike minus Lower Strike
Binary Call Option	$1
Binary Put Option	$1
Up-And-Out Call Option	1 Underlying Asset
Up-And-In Call Option	1 Underlying Asset
Down-And-In Put Option	Strike in $
Down-And-Out Put Option	Strike in $
Forward Contract Long	Traded Strike in $
Forward Contract Short	1 Underlying Asset

Step 2 – Calculate the Scaled Trade Collateral Amount

The Scaled Collateral Amount for a trade is calculated by multiplying the Collateral Amount with the size of the trade that was executed by the Option Contract seller.