Options written by multiple parties don't seem to share losses fairly

[nmclrn]

If each option is written by only one LP, and the options prove profitable for any buyers, that LP will take a loss.

If each option can be written by more than one LP (is this a supported case?), and a strict subset of buyers exercise the option at a profit, then it's not obvious to me which of the LPs will take a loss.

Common sense suggests to me that maybe they should each share in all such losses, in proportion to their redeem token holdings.

A quick skim of the code suggests that the LPs who are quick to close their options may be made whole (get their collateral back in full), and the slowest LP(s) will find there is not enough collateral left, and will have to take the (presumably lower valued) strike tokens instead? Have I understood that right, and if so is it intentional?

[Alexangelj]

Wow missed this issue!

You make a good point. In this case, they are not necessarily LPs but direct counter-parties instead. Writers.

It is in fact a race condition. Lets say 50% of the options minted are exercised, which leaves the strike asset in the contract (which is presumably less value than the underlying). In this case, once the option expires, the short option tokens (redeem tokens) can be burned and take whatever is left in the contract. This is a race condition, where the first writers that "close" will receive the underlying tokens, which means the next writers will have to withdraw strike assets instead.

This was purposefully left in the design of the contract, because it ensures that writers are closing their positions as soon as possible. It's not ideal though, I think the suggestion to distribute the losses to writers equally is a much better system. This can be done by making the short token an IOU (entitled to a proportion of all remaining collateral/strike) rather than 1:1 burn.

Please send me a msg on discord to discuss more!

alex.ander.eth#5431