> ## Documentation Index
> Fetch the complete documentation index at: https://docs.convallax.com/llms.txt
> Use this file to discover all available pages before exploring further.
# How Options Work
> Understand European calls and puts on prediction market YES tokens — strikes, payoffs, collateral, and option token mechanics.
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)` |
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.
A **put option** at strike K = 60¢ pays out if the YES price finishes below 60¢ at expiry.
* If YES resolves at 30¢ → payoff = **30¢ per option** (0.60 − 0.30)
* If YES resolves at 60¢ or above → payoff = **0** (option expires worthless)
* If NO wins outright (S = \$0.00) → payoff = **60¢ per option** (maximum)
**Use case:** You believe a prediction market outcome is less 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:
```solidity theme={null}
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 |
* 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.
* 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 |