Clearing V1
Recollateralization Auction
When HyperCore force-closes a writer’s cover, their short is left unbacked. The recollateralization auction makes it whole: a permissionless, ascending auction that either buys the short back or hands it to a new writer, funded by the seized perp margin and the option bond. It lives inside the core and leans on the same venues that price the options.
When it opens
A cover is force-closed when HyperCore liquidates part of the writer’s perp, so the cover no longer covers their outstanding shorts. A writer cannot drop below that floor on their own, so a deficit is unambiguous: it means a force-close. Anyone can open the resolution on the position; while the cover still covers the shorts it reverts CoverStillSufficient.
Opening is a keeper’s job in practice, and whoever opens it is the finder, paid the finder fee reserved on top of the bond at mint. Filling is open to anyone. While a position is in resolution, exercising or closing it is frozen (InResolution) until the auction settles.
Pricing the auction
The auction re-prices the option the moment it opens, off the live SVI smile at the current mark and the shortened time to expiry, so the start reflects the option now, not the stale bond posted at mint. That smile is set with a deliberately high IV: it prices the option conservatively so the bond a writer locks is generous and the insurance pool is rarely touched. The per-ticker discount chops that markup back off for the auction, taking the high smile price down to a realistic opening price, a 20% discount on a $5 smile price opens the auction at $4. From there the offer ascends each block toward a ceiling.
The ceiling is the recollateralization budget: the margin seized from the closed perp plus the option bond, net of the finder fee. The offer climbs block by block but never crosses it, and when the budget is not enough to close the position, the insurance pool covers the rest. The budget can fall short for more than one reason: the smile may have mispriced the option at mint and set too small a bond (an out-of-the-money option can be underpriced just as an in-the-money one can), or no participant may be willing to buy the long or take on the short at any offer up to the ceiling. Whenever the option is worth more than the budget, the market pricing it at $100 against an $80 budget, say, the auction can only reach $80, and closing it out falls to insurance, the last-resort bidder at the ceiling (below).
Filling it
The simplest fill is a buy-to-close: a filler tenders the matching long, both legs are extinguished, and the writer’s outstanding-short floor drops by that size. The filler is paid the current offer, the finder takes their fee, and the excess between the offer and the budget is split by a governed lever, a cut to the DAO, a cut back to the force-closed writer, and a cut to the insurance pool.
Because the long is a plain asset and the fill is a single call, the buy-to-close is arbitrage-friendly: buy the long on a venue and tender it to the auction in the same transaction whenever the offer is worth more than the long costs. The offers plug straight into the markets too, a keeper network can post the live auction as signed orders on a CLOB, so ordinary exchange liquidity clears it.
Novation
Instead of buying the short back, a new writer can take it over, novation, recollateralizing the position in exchange for the auction premium rather than closing it. There are two ways to do it:
- Perp-novation. Bring a perp cover and back the short like any writer. This is the one fill that is not atomic, the replacement cover has to be opened and confirmed on HyperCore first (the fire-then-verify rule), so it runs in two steps rather than a single flash.
- Spread-novation. Buy a capping long instead and lock only the width, no perp. An auction on a $2,000 call is taken by buying a $2,200 long and locking $200, defined risk, and because there is no perp to open it settles atomically. See Spreads.
If no one fills
As long as the option is worth no more than the budget, the ascending offer guarantees a fill: it climbs until closing the position is worthwhile and a filler takes it. If the option is worth more than the budget, no market filler will, and it falls to insurance. Insurance is not a pool that pays out a gap, it is an external protocol that bids the auction like any trader, through its own account, and only at max budget. It takes the short on there, by perp- or spread-novation, and absorbs the shortfall from its own reserves, so the long holder keeps a backed option. See Insurance.