This section outlines what occurs when options expire and are settled.

ITM - In the Money

OTM - Out of the Money

Scholes Protocol currently supports European style Options that are exercised automatically at expiry.

Though it should be noted Scholes Protocol can support European and American style Options on ERC-20 assets - managing their lifetime including collateralization, exercising and liquidation.

Expiration Settlement

When an option contract reaches its expiration date and the option has intrinsic value (meaning the Strike Price < Spot Price for call options, or Strike Price > Spot Price for put options) settlement occurs. Upon settlement, the intrinsic value of the option is paid out to the option holder.

ITM Option Settlement

Steps to settlement:

1. The value of the option is calculated to determine the payout for the option buyer
2. The intrinsic value is paid out from the collateral vault’s of the options underwriters
3. If there is more intrinsic value still to be paid to the option holder, underwriter collateral is liquidated (sold to USDC) and paid to the option holder
4. Remaining underwriter collateral is unlocked and able to be withdrawn or underwritten against

OTM Option Settlement

Upon option expiration, if the option has no intrinsic value the option will expire worthless. Steps to settlement:

1. The value of the option is calculated from the Scholes reference pricing to determine the payout for the option buyer
2. Underwriter collateral is unlocked and able to be withdrawn or free to underwrite new options