🛠️How Synth Options Work

An overview of Synth Option functionality

The Synthetic Option algorithm was derived from prior work done by our quant team in various TradFi investment banks and hedge funds on exotic options trading.

To replicate the option profile, the Synth Option algorithm continuously adjusts position trades in a hedging portfolio of tokens and perpetuals in response to market price movements.

The cost of this trading, combined with any funding costs paid or received, represents the 'running costs' of the Synth Option, which approximate the premium that would be paid on a traditional option.

As these running costs are incurred over time, running a Synth Option typically requires an initial collateral top-up equivalent to 10% of the notional hedged. After this, 2 things may happen:

  1. The token price goes up (in the case of a Synth Call), and the Synth becomes 'self-funding', i.e. the profits made pay for ongoing running costs; or

  2. The token price goes down or doesn't move, in which case the collateral gradually gets reduced by running costs.

If collateral drops below 7.5% of the Synth notional, we'll ask you to Top-up the collateral back to 10%. If you decide not to do so, and the collateral drops below 5% of notional, we cut the notional coverage of the Synth in half (e.g. the 30 ETH Synth Call Notional Exposure in the image above, would be altered to 15 ETH, thus halving the user's notional exposure and double that position's collateralization ratio).

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