Commissions and Collateral

How does Panoptic calculate collateralization requirements?

Collateral tracking

Depositing collateral

Each account in Panoptic has to deposit collateral in order to mint an option. This is done by calling the deposit(uint128 assets, address token) function in PanopticPool.sol. The PanopticPool smart contract will issues a receipt token (similar to Aave's aToken and Compound's cToken) which uses a shares model to track yield distribution.

The amount of shares received after depositing uint128 assets is computed using the convertToShares(uint128 assets) function from ReceiptBase.sol:

uint256 shares =  (uint256(assets) * totalSupply()) / totalBalance();

where totalSupply() returns the total amount of receipt token issued and totalBalance() returns the amount of token available to withdraw

uint256 totalBalance() =
    underlyingToken.balanceOf(panopticPool) -  // total amount in the PanopticPool
    collectedFees() + // amount of collected fees (protected)
    inAMM(); // amount moved from PanopticPool to UniswapV3Pool (available)

Here, the accumulator collectedFees() tracks the amount of fees that have been collected. This amount does not count towards totalBalance() because it is reserved to pay options sellers.

The accumulator inAMM() tracks the amount of token that has been moved from the PanopticPool to the UniswapV3Pool. This amount does cound towards totalBalance() because it has not left the Panoptic-Uniswap ecosystem.

Withdrawing collateral

When a user wants to withdraw their tokens out of the Panoptic pool, they have to call withdraw(uint256 shares, address token, uint256[] calldata positionIdList). Accumulated yields from the deposited collateral will be transferred pro-rata to the user according to the shares model, where:

uint128 assets = (shares * totalBalance()) / totalSupply();

where totalBalance() and totalSupply() are computed as described in the Deposit section.

The third argument of the withdraw() function, positionIdList, must be the list of all positions held by msg.sender. The positionIdList will be used to compute the collateral requirement for the account, and will fail if the position will be margin called or underwater (ie. collateralRequired / collateralBalance < 1).

Margin Requirements

Panoptic makes use of built-in leverage to enable the minting of undercollateralized options. In traditional finance, some accounts like IRA or a Level 1 trading account, requires all options to be fully collateralized. Specifically, users in IRA accounts can only sell cash-secured puts or covered calls, which means they have to deposit the notional value of the underlying position in cash (for cash-secured puts) or own the underlying shares (for covered calls).

Undercollateralization is handled by reducing the buying power requirement of an asset. In the examples above, a Level 4 trading account in a brokerage firm may be able to sell naked puts and naked calls by only posting about 5x less collateral than in a Level 1 account. For Portfolio margin accounts, the collateral requirements could be even smaller, requiring about 10-15x less collateral than a Level 1 account.

Buying Power Reduction

The amount of capital available to place trade with is defined by this collateral and is called the Buying Power. For example, if Alice deposits 1500 Dai and 2 ETH the ETH-Dai-30bps Panoptic Pool when the price of ETH is 1500Dai, then her buying power on the put side is 4500 Dai and it is 2.5 ETH on the call side.

The minting of any option in Panoptic will reduce the account's Buying Power. The Buying Power Reduction of an option depends on 1) the notional value of that option and 2) the price of the underlying asset and 3) the pool utilization at the time the position was minted.

Financial Industry Regulatory Authority (FINRA) Rule 4210 (FINRA, 2022) and the Cboe rules (CBOE, 2022) state that the margin account collateral requirements for a short put or a short call are:

100% of option proceeds plus 20% of underlying security/index value less out-of-the- money amount, if any, 
to a minimum of option proceeds plus 10% of underlying security/index value for calls; 
10% of the put exercise price for puts. (source: Cboe Rule 10.3)

---

Collateral requirements for BUYING

The collateral requirements for buying an options depends on the poolUtilization.

Concretely, the collateral requirement will be 10% of notional when the pool utilization is less than 50% and will decrease linearly to 5% between 50% and 90% pool utilization.

poolUtilization (%)	0	10	20	30	40	50	60	70	80	90	100
buy_collateral_ratio (%)	10	10	10	10	10	10	8.75	7.5	6.25	5	5

Then, the buying power reduction for this long option is simply $\mathtt{BUY\_COLLATERAL\_RATIO \cdot notionalValue}$ is the position is Out-The-Money. If the position is In-The-Money, the Panoptic pool will swap the required assets after moving them out of the Uniswap pool, so the buying power reduction will be $\mathtt{BUY\_COLLATERAL\_RATIO \cdot notionalValue + \frac{currentPrice}{strike}\cdot notionalValue}$.

$$BUY\_COLLATERAL\_RATIO = \begin{cases} \mathtt{0.1} & p < 50\%\\ \mathtt{0.125\cdot\left(1.3 - poolUtilization\right)} & 50\% < p < 90\%\\ \mathtt{0.05} & > 90\% \end{cases}$$

---

Collateral requirements for SELLING

The collateral requirements for buying an options depends on the poolUtilization.

Concretely, the collateral requirement will be 10% of notional when the pool utilization is less than 50% and will decrease linearly to 5% between 50% and 90% pool utilization.

poolUtilization (%)	0	10	20	30	40	50	60	70	80	90	100
sell_collateral_ratio (%)	20	20	20	20	20	20	40	60	80	100	100

$$SELL\_COLLATERAL\_RATIO = \begin{cases} \mathtt{0.2} & p < 50\%\\ \mathtt{2\cdot\left(poolUtilization - 0.4\right)} & 50\% < p < 90\%\\ \mathtt{1} & > 90\% \end{cases}$$

---

Commissions & Fees

This contrasts with brokerage firms that charge a fixed commission when a position is opened and closed. When a position expires, however, no commission is paid regardless of if it expired in-the-money or out-the-money. A consequence of this is that users may keep their position open for longer because they do not want to paid the commission.

In Panoptic, since options never expire and we wanted to limit any that could impact the decision-making when closing a position, commissions are only paid when a new position is minted.

However, commissions depend on the pool utilization according to:

$$COMMISSION = \begin{cases} \mathtt{0.002\cdot Notional} & p < 50\%\\ \mathtt{0.002\cdot Notional\cdot2^{14\cdot\left(poolUtilization-0.5\right)}} & p > 50\%\\ \end{cases}$$

poolUtilization (%)	0	10	20	30	40	50	60	70	80	90	100
commission (bps)	20	20	20	20	20	20	50	140	367	970	2560