How Options Work - Convallax

Convallax issues European cash-settled options on the YES outcome price of a Polymarket binary market. Each option gives the holder exposure to whether a market’s implied probability finishes above (call) or below (put) a chosen strike price at expiry.

The Underlying

The underlying asset is the YES token price of a Polymarket binary market, denoted S. This price represents the market’s implied probability of the event occurring:

S = 0 means the market prices the event at 0% probability (NO wins)
S = 1 means the market prices the event at 100% probability (YES wins)
S = 0.65 means the market prices the event at 65% probability

Convallax options settle against this price at expiry, either as a binary outcome (0 or 100) or as a continuous TWAP price.

Calls and Puts

Type	You profit when…	Payoff at expiry
Call	YES finishes above strike K	`max(0, S − K)`
Put	YES finishes below strike K	`max(0, K − S)`

Call option
Put option

A call option at strike K = 50¢ pays out if the YES price finishes above 50¢ at expiry.

If YES resolves at 80¢ → payoff = 30¢ per option (0.80 − 0.50)
If YES resolves at 50¢ or below → payoff = 0 (option expires worthless)
If YES wins outright (S = $1.00) → payoff = 50¢ per option (maximum)

Use case: You believe a prediction market outcome is more likely than the current price implies.

Strikes

Strikes are quoted in cents and available in 5¢ increments from 5¢ to 95¢:

5¢, 10¢, 15¢, 20¢, 25¢, 30¢, ... , 85¢, 90¢, 95¢

On-chain, strikes are stored as **basis points of

1** (`strikeBps`), where 50 bps =

0.50. The full strike grid gives traders granular control over their risk/reward profile.

Long vs Short

Position	Action	Risk	Reward
Long (buyer)	Pay premium upfront	Limited to premium paid	Up to max payoff minus premium
Short (writer)	Receive premium, post collateral	Up to max payoff minus premium received	Limited to premium received

Buying options gives leveraged exposure with capped downside — you can never lose more than the premium.
Writing (selling) options earns premium income but requires posting USDC collateral to cover the worst-case payout.

Option Tokens (ERC-1155)

Each option series is represented as an ERC-1155 token on Polygon with 6 decimal places (matching USDC precision). The token ID equals the series ID, which is derived deterministically:

seriesId = uint256(keccak256(abi.encode(conditionId, yesClobTokenId, strikeBps, expiry, optionType)))

Parameter	Description
`conditionId`	Polymarket market condition ID (bytes32)
`yesClobTokenId`	Polymarket YES CLOB token ID (uint256)
`strikeBps`	Strike price in basis points of $1 (e.g. 50 =$ 0.50)
`expiry`	Unix timestamp of option expiry
`optionType`	0 = Call, 1 = Put

Only the ConvallaxCore contract can mint and burn option tokens. Tokens are freely transferable via standard ERC-1155 transfers.

Collateral

The writer is whoever posts collateral when a trade fills — the maker on a long trade, the taker on a short trade. Collateral is locked atomically at fill time via ConvallaxCore.mintFor; there is no pre-minting or held inventory. The writer must post USDC collateral equal to the maximum possible holder payout for the options minted. The on-chain formula (in OptionMath.requiredCollateral):

Call:  collateral = amount × (100 − strikeBps) / 100
Put:   collateral = amount × strikeBps / 100

Where amount is in 6-decimal raw units (matching USDC precision).

Type	Collateral per whole option
Call	`(100 − strikeBps) / 100` USDC — the max call payoff if S = $1.00
Put	`strikeBps / 100` USDC — the max put payoff if S = $0.00

Worked example: 10 call options at K = 50¢

Strike: 50¢ (strikeBps = 50)
Collateral per option: (100 − 50) / 100 = $0.50
Raw amount: 10 × 1,000,000 = 10,000,000
Raw collateral: 10,000,000 × 50 / 100 = 5,000,000 (= 5.00 USDC)

At fill, the writer’s 5 USDC is locked in ConvallaxCore and 10 call option tokens (ERC-1155) are minted to the holder.

Worked example: 5 put options at K = 60¢

Strike: 60¢ (strikeBps = 60)
Collateral per option: 60 / 100 = $0.60
Raw amount: 5 × 1,000,000 = 5,000,000
Raw collateral: 5,000,000 × 60 / 100 = 3,000,000 (= 3.00 USDC)

At fill, the writer’s 3 USDC is locked and 5 put option tokens are minted to the holder.

Premium Bounds

The premium (price) of an option is bounded by the maximum payoff:

Call premium must be ≤ 1 − K (the max call payoff)
Put premium must be ≤ K (the max put payoff)

This ensures no-arbitrage: you never pay more for an option than the most it could ever pay out.

Units and Decimals

Quantity	Decimals	Example
USDC	6	`1,000,000` raw = 1.00 USDC
Option tokens	6	`1,000,000` raw = 1 whole option
Strike / resolution	basis points of $1	`50` = $0.50

​The Underlying

​Calls and Puts

​Strikes

​Long vs Short

​Option Tokens (ERC-1155)

​Collateral

​Premium Bounds

​Units and Decimals