An option seller needs to put down money (in BTC, ETH, or stable coins) as collateral when they issue options. This collateral will be liquidated in the event the price movement goes against the seller's wish and the seller fails to deposit more collateral to keep their positions. In Rysk’s system, the collateral can be either the underlying asset (BTC, ETH, etc.) or USDC for both call and put options, which allows users to have more flexibility on the deposit asset, control risk better, and minimize portfolio variance.
Rysk’s collateral mechanism is derived from Opyn’s partial collateralisation, meaning the option seller doesn’t need to fully back their options trades. Instead, we only require a fraction of the total value of the contract. The collateral required for an option is determined by the following formulas:
for the put, and
for the call.
In the above formulas, s is the strike price of the collateralised option, p is the underlying asset price at valuation time, "spot_shock" is how much we expect the underlying asset could move before a liquidation could occur, t is the time to expiry, and P(t) is the corresponding shock values of at-the-money options. Sometimes we call P(t) the expiry to value function because it maps the time to expiry to shock values.
In Rysk implementation, the default value for spot_shock is 0.7 This value is chosen based on the level of risk we take but can be flexible around this value.
The partial collateral mechanism allows better leverage and capital efficiency. However, it requires extra attentiveness which is carefully dealt with by Rysk’s collateral health management strategy.