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Convallax is built around market makers who provide liquidity by shorting options. Every short option needs USDC collateral to guarantee the holder can be paid at expiry. The least capital-efficient way to set that collateral is to look at each trade in isolation and lock its maximum possible loss. That is the simple max-loss approach. Smart Margin is the more efficient way. It looks at a market maker’s whole book as a single payout surface and locks only the true worst-case payout, not the sum of every individual worst case. Because prediction-market underlyings are bounded between 0and0 and 1 and a call and a put at the same strike cannot both finish in the money, a lot of the stacked “max losses” in a multi-position book can never happen at the same time. Smart Margin removes that dead weight from the collateral requirement.

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The least efficient approach: max loss per trade

If a market maker is short q_c calls and q_p puts at the same strike K, the simple approach adds each trade’s maximum possible payout:
This treats the call’s worst case (S_T = 1) and the put’s worst case (S_T = 0) as if they could both occur. But the YES price cannot finish at 1.00and1.00 and 0.00 simultaneously. For a mixed book, that over-collateralizes: it locks the cost of two mutually exclusive disasters. For a multi-strike or multi-market book, the same effect repeats. Worst cases are stacked across strikes and markets that cannot all resolve against the maker at once. The simple approach leaves a lot of maker capital sitting idle.

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Smart Margin: net the payoffs

Smart Margin starts from the same payoff definitions:
A call and a put at the same strike always add to the absolute distance from K:
This is the payoff of a long straddle. When a market maker is short both a call and a put at the same strike, the holder only collects on one side — not both — because the final price S_T is a single number. For a short book of q_c calls and q_p puts at strike K, the total payout owed is q_c C_K(S_T) + q_p P_K(S_T). Because S_T is bounded on [0, 1], the worst case is reached at one of the two endpoints: So Smart Margin locks the larger of the two mutually exclusive outcomes:
This is the efficient worst case for that strike — the larger of two outcomes that cannot happen together.

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Which endpoint dominates?

Let delta = q_c − q_p, so q_c = q_p + delta. The condition for which boundary has the larger payout is:
  • If q_p(2K − 1) > delta(1 − K), the worst case is S_T = 0 and the collateral is q_p × K.
  • If q_p(2K − 1) < delta(1 − K), the worst case is S_T = 1 and the collateral is q_c × (1 − K).
  • If the two expressions are equal, both endpoints require the same collateral.
When the book is one-sided (q_p = 0 or q_c = 0), the formula reduces to the same per-position max loss. The efficiency gain appears when a maker is short both calls and puts around the same strike.

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Numerical examples

  • q_c = 100, q_p = 100, K = 0.70, delta = 0
  • Simple max loss: 100 × 0.30 + 100 × 0.70 = $100
  • Smart Margin: max(100 × 0.70, 100 × 0.30) = $70
  • Capital saved: 30% for this strike
  • q_c = 50, q_p = 150, K = 0.60, delta = -100
  • At S_T = 0: 150 × 0.60 = $90
  • At S_T = 1: 50 × 0.40 = $20
  • Smart Margin: max(90, 20) = $90
  • Simple max loss would be 50 × 0.40 + 150 × 0.60 = $110
  • q_c = 100, q_p = 0, K = 0.50
  • Smart Margin: max(0 × 0.50, 100 × 0.50) = $50
  • This is the same as the simple per-trade max loss, because there is nothing to net.

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Extending across strikes and markets

A real market-making book contains many strikes and many prediction markets. For each underlying the final price is still bounded on [0, 1], so the total portfolio payoff is a piecewise-linear function of a finite set of prices. The true worst case of the whole book is found at boundary points and strike points. Smart Margin evaluates that function across all of a maker’s open shorts and returns a single portfolio-level collateral number. Because it nets offsetting exposures, it reduces the capital required for multi-strike and multi-market books the same way it does for a single strike: the collateral is the actual worst case of the combined surface, not the sum of isolated maxima.

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What this means for market makers

  • More capital stays available for quoting. Less USDC is locked against payouts that cannot happen at the same time.
  • Two-sided markets become economical. A maker can comfortably quote both calls and puts around the same strike without doubling the collateral.
  • Multi-strike and multi-market books scale better. Portfolio-level netting replaces position-by-position stacking of worst cases.
  • Collateral matches the real risk. It is sized to the true worst-case payout of the book, not a conservative sum of mutually exclusive extremes.