Clearing V1
Exercise & Settlement
Options are American and cash-settled, and exercise is bounded by expiry. A holder exercises any time the option is in the money up to expiry and collects the intrinsic in the bond token; the assigned writer settles by funding that intrinsic from their realized cover and reclaiming the bond. Anything left at expiry, an out-of-the-money option or an in-the-money one the holder did not exercise in time, settles the other way: the short is retired and the bond refunds.
Exercising in the money
Exercise is open any time the option is in the money, up to expiry. The exerciser surrenders their long leg and pays nothing else; in return they are owed the intrinsic, the distance between the oracle price and the strike, times the size they exercise. With no intrinsic to claim it reverts NotItm.
The amount owed is fixed at the moment of exercise, off the oracle price then. This is lock-at-exercise: later price moves change neither what the exerciser is owed nor what the assigned writers owe.
Exercise is assigned to specific writer positions the exerciser names, all on one ticker. Each named short is retired on the spot, that writer’s outstanding-short floor drops by its size, and the writer is recorded as owing that position’s share of the intrinsic. A named writer must still be covered: if HyperCore has already force-closed their cover the position cannot be assigned here, it goes through resolution instead, and exercise reverts CoverDeficit. That closes the window between a force-close and the auction where a claim would otherwise be left unfundable.
When a long cannot be exercised
Exercise is not unconditional, and that is a real constraint on a long holder. Because it assigns to specific backing shorts, every named short has to be a valid, still-covered position, and the call is all-or-nothing: one bad leg reverts the whole batch. A short is not assignable if its cover has been force-closed (CoverDeficit), if it is already in a resolution auction (InResolution), or if it has already been exercised (AlreadyExercised). A short that is mid-recollateralization is, by definition, not a valid backing short, so exercise rejects it rather than pay out against a cover that is no longer there.
The consequence: in a stressed ticker, where backing shorts are being bought back or novated, a holder can find they are unable to exercise against those positions. They are not stranded, the long is made whole the other way, bought back through the auction with insurance behind it, rather than exercised. The same rule governs recursive, multi-leg exercise: if any short in the chain is not validly backed, the whole settlement reverts. A long is only ever paid against a cover that is actually there.
The claim ledger
Exercise opens a claim that carries three running numbers: what is owed (fixed at exercise), what has been funded toward it, and what the exerciser has paid out to themselves. Funding and collection are separate, so a claim settles in parts as each assigned writer pays in.
fundClaimpays collateral toward a claim, capped at the amount still owed. This is the seam the assigned writers’ realized covers pay through, and it is open, anyone can top up a claim, so a writer who cannot pay never strands the exerciser.collectpulls whatever has been funded but not yet paid out to the exerciser. It is safe to call repeatedly as the claim fills.
Because owed is fixed and funded only rises, the exerciser is never shorted and never overpaid, they draw exactly the intrinsic as the covers behind it are realized. The insurance pool is the backstop of last resort for a claim its writers do not fund.
How the writer settles
On a clean exercise the assigned writer settles their position: they deliver its share of the intrinsic, funded from the cover they just realized, and reclaim their full bond. The cover pays the option’s payout; the bond was only ever a floor, so it comes back.
This is the defining split of the model. On every clean path, an exercise the writer settles or an out-of-the-money expiry, the cover funds the payout and the bond refunds. The bond is consumed only when a writer is force-closed and cannot settle, which is what the recollateralization auction draws on. A writer’s obligation never leaves their own account, so settlement is always theirs to make.
Settling at expiry
Exercise is bounded by expiry. A holder can exercise any time the option is in the money up to expiry, but expiry is a hard cutoff: an in-the-money option that is not exercised in time is forfeited, the right lapses. To capture the intrinsic, a holder has to exercise before expiry. On tickers that run an auto-exercise keeper network, though, that rarely bites: a keeper does it for the holder a set window before expiry, taking a cut of the intrinsic, the on-chain version of a broker exercising at the close.
After expiry the position settles in one step, whether it finished in or out of the money. settle retires the short, drops the writer’s outstanding-short floor, and refunds the full bond to the writer, and it is permissionless: anyone, or a keeper crank, can settle an expired position, so covers are freed promptly and never stay pinned. The writer keeps their cover; an unexercised in-the-money long simply lapses.