> For the complete documentation index, see [llms.txt](https://docs.smartpiggies.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.smartpiggies.com/getting-started/what-is-a-piggy/background-what-is-a-financial-option.md). # Background: What is a financial option? In the simplest terms, an options contract is very much what it sounds like: the right (but not obligation) to purchase or sell an asset at a fixed price at some point in the future. Because options rely on a reference asset (called the "underlying"), they are said to be a type of "derivative" asset – they derive their value from the value of the underlying. **Call Option** A Call Option is a contract that allows the holder to **purchase** the underlying asset in the future. **Put Option** A Put Option is a contract that allows the holder to **sell** the underlying asset in the future. **Cash Settled vs. Physically Settled** Physically settled options oblige the seller to deliver the actual underlying if the option is executed. Upon execution of a cash settled option a calculation is performed and the holder receives the amount of cash they would have had the they delivered/received the underlying and purchased/sold the position on the open market. Cash settled options are often preferred to physical settlement as cash is usually more convenient. Cash allows for leverage and does not require delivering/receiving a physical asset (of uncertain quality) at a certain place and time. Physically settled options on the other hand eliminate the need for fair market price. SmartPiggies contracts are settled in cash. **Strike Price** Strike Price is the price which the contract holder entitled to buy/sell the underlying. **Maturity** Maturity is the date/time at which to optionality of the contract expires. For a SmartPiggies contract, the holder may clear and settle at any time. After maturity, the contract writer is also free to clear and settle the contract. **Capped** A capped option limits the possible profit for its holder. A traditional capped option is automatically exercised by your broker-dealer/banker once the cap is reached. Smartpiggies contracts are not automatic and must be settled by the holder. The contracts are capped because each Smartpiggy is allocated a limited amount of collateral, once that collateral is exhausted, the maximum benefit to the holder has been reached and the holder should take action to clear and settle the contract. Since the failure scenarios ... vs margin .... also flexability ... nft nature Further Reading: Example Real-World Use Cases (Pink Paper) --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.smartpiggies.com/getting-started/what-is-a-piggy/background-what-is-a-financial-option.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.