Settlement Methods
Settlement is how an option resolves at exercise: what the taker pays, what they
receive, and under what conditions exercise is allowed. Overcast keeps that
behavior pluggable — every option pins a settlement_layer in its terms —
so the same negotiation and rights machinery can run several product shapes.
Hierarchy (start here):
| Level | What it is | Examples |
|---|---|---|
| Layer | On-chain module pinned in terms (settlement_layer) | Physical · Oracle-gated (Gated or Intrinsic mode) |
| Access | Opt-in (borrow_allowed) | Collateral idle vs borrowable while live |
| Method | Product choice = layer (+ mode) + Access | Physical · Raw · Physical · Gated · Intrinsic · Access · … |
A method is what you choose in the product. A layer is what the chain enforces. Access is an opt-in: it never changes the exercise exchange — only whether posted collateral can be borrowed until expiry (Borrowing and repaying).
For lifecycle hooks (can_exercise, can_borrow, …) see
Protocol Features · Settlement Methods.
Layers that ship today
Start with the layers. Methods below are only compositions of these.
A settlement layer is a pluggable, decision-only module. It never holds funds.
The core protocol owns every escrow; the layer answers can_match,
can_exercise, can_redeem, and can_borrow.
In the SDK registry (app.settlement) the known kinds are "physical" and
"oracle" (oracle-gated). Commit the config before signing:
details.settlementLayer = await app.settlement.defaultConfig(details);
See The RFQ Lifecycle · Settlement Methods
for how the field sits inside OptionDetails.
Layer · Physical (Raw)
Unconditional asset exchange at exercise — no oracle:
- Taker pays the full proportional settlement asset — only at exercise, not for the life of the option.
- Taker receives the full proportional collateral.
- Exercise is allowed whenever the exercise window is open.
- ITM/OTM is game-theoretic: revealed by whether the taker exercises or not (method 01 · Physical · Raw).
SDK kind: "physical".
Layer · Oracle-gated
Exercise is allowed only when the oracle price makes the option in-the-money. Each chain reads the price feed native to it:
| Chain family | Oracle |
|---|---|
| Solana | Pyth |
| EVM | Chainlink Data Feeds |
SDK kind: "oracle". Two modes:
Mode · Gated
Same exchange as Physical (full settlement asset ↔ full collateral; notional only at exercise). The oracle replaces game theory: exercise is refused when the feed says the option is out-of-the-money.
→ Method 02 · Physical · Gated.
Mode · Intrinsic
Cash-settled-style payout without the taker funding the settlement asset:
- Taker forgoes paying the settlement asset.
- Taker receives the profit (price surplus) from collateral, in collateral units.
- Remaining collateral stays escrowed for the maker to redeem.
→ Methods 03 · Intrinsic and 05 · Access · Intrinsic.
From layers to five methods
| # | Method | Layer | Access opt-in | ITM/OTM |
|---|---|---|---|---|
| 01 | Physical · Raw | Physical | off | Game theory (taker) |
| 02 | Physical · Gated | Oracle-gated · Gated | off | Oracle |
| 03 | Intrinsic | Oracle-gated · Intrinsic | off | Oracle |
| 04 | Access · Physical | Physical or Oracle-gated · Gated | on | Game theory or oracle |
| 05 | Access · Intrinsic | Oracle-gated · Intrinsic | on | Oracle |
01 and 02 differ only in the ITM/OTM gate (game theory vs oracle). They require the same capital over the option lifecycle, so the capital chart merges them into one Physical row (and one Access · Physical row for 04).
TradFi mapping
| TradFi style | Closest Overcast layer / method |
|---|---|
| Physical delivery | Layer · Physical (Raw) · Oracle-gated · Gated |
| Cash settlement / intrinsic value | Oracle-gated · Intrinsic — payout in the collateral asset, not cash-only |
Mirrors apply for puts: the cash and volatile legs swap sides in the terms; the same layers and methods apply.
Running example
We use the following example to emphasize capital differences across methods:
350 NVDA call · strike $200 · spot $220 → $7,000 delta (gain of the underlying at the moment of the exercise)
Capital efficiency (chart)
Five methods · four capital rows. Methods 01 and 02 are identical in capital: premium at match; strike notional only if and when the taker exercises (at expiry / in the exercise window) — never locked for the life of the option.
Method details
01 · Physical · Raw
| Method | Physical · Raw |
| Layer | Physical |
| Access | off |
Full physical delivery exchange with no on-chain price check — the Raw Physical layer. Capital matches 02 on the chart.
Timing: the taker pays the premium at match. The strike notional (settlement asset) is provided only at expiry / exercise — if they choose to exercise. It is not escrowed for the life of the option.
ITM / OTM is defined by the taker’s choice in the exercise window:
- Exercise — pay full proportional settlement asset, receive full proportional collateral (revealed ITM).
- Refuse / do nothing — window closes; maker redeems collateral (revealed OTM / not worth exercising).
How the game theory works
The protocol does not need to know the spot price. A rational taker only exercises when the exchange improves their position relative to not exercising.
For the running call (buy collateral by paying strike notional):
- If spot is above strike (e.g. NVDA at $220 vs $200 strike), exercising buys ~$220 of shares for $200 of settlement asset — positive intrinsic value. The economical move is to exercise (or sell the right if someone will pay more than holding through exercise).
- If spot is below strike (e.g. NVDA at $180 vs $200), exercising would pay $200 for something worth ~$180. There is no economical incentive to exercise. Letting the window expire is strictly better than overpaying for the collateral — so the option expires unexercised without any oracle gate.
The same logic flips for a put (sell collateral for strike notional): exercise only when strike cash is worth more than the collateral at spot.
Exception — better exit elsewhere. Game theory is about the taker’s whole opportunity set, not only the on-chain exercise. Even when spot is below strike, a taker might still exercise (or otherwise settle) if they can exit the position under better conditions than the raw spot-vs-strike comparison — for example transferring or selling the option/claim to someone who values the delivery, using access/borrow to restructure exposure, or meeting an off-market need for the collateral that makes the strike notional acceptable. Absent such an exit, OTM (spot below strike for a call) means do nothing.
That incentive alignment is the economic mechanism: rational non-exercise replaces an oracle’s OTM reject. Useful when a reliable feed is unavailable, when both legs are exotic assets, or when counterparties prefer revealed preference over an oracle.
| Leg | Amount | When |
|---|---|---|
| Maker locks | $70,000 collateral | Match |
| Taker pays premium | $3,500 | Match |
| Taker pays notional | $70,000 settlement asset | Exercise only |
| Taker receives | Full collateral (~350 shares) | Exercise |
| Buyer capital over lifecycle | $73,500 if exercised | Premium early · notional at exercise |
02 · Physical · Gated
| Method | Physical · Gated |
| Layer | Oracle-gated · Gated |
| Access | off |
Same full physical exchange and same capital timing as 01 (premium at match; notional only at exercise). The difference is the gate: exercise is allowed only when the oracle says the option is ITM. OTM is refused by the feed, not by the taker’s rational skip.
| Leg | Amount | When |
|---|---|---|
| Maker locks | $70,000 collateral | Match |
| Taker pays premium | $3,500 | Match |
| Taker pays notional | $70,000 settlement asset | Exercise only (if oracle ITM) |
| Taker receives | Full collateral (~350 shares) | Exercise |
| Buyer capital over lifecycle | $73,500 if exercised | Same as 01 |
03 · Intrinsic
| Method | Intrinsic |
| Layer | Oracle-gated · Intrinsic |
| Access | off |
No notional posted. Only the $7k delta changes hands from collateral. The taker forgoes the settlement asset and receives the profit (price surplus) in collateral units. Remainder stays for the maker to redeem.
This is TradFi cash settlement generalized beyond fiat — the surplus can be SOL, a tokenized equity, an RWA receipt, or a stablecoin.
| Leg | Amount |
|---|---|
| Maker locks | $70,000 collateral |
| Taker pays at match | $3,500 premium |
| Taker pays at exercise | $0 settlement asset |
| Taker receives | $7,000 delta in collateral units |
| Maker residual | Remainder of collateral, redeemable |
| Buyer commits | $3,500 (premium only) |
04 · Access · Physical
| Method | Access · Physical |
| Layer | Physical (Raw) or Oracle-gated · Gated |
| Access | on (opt-in) |
Same exercise economics and notional timing as Physical (01 Raw or 02 Gated), but the taker can borrow posted collateral while the option is live. Capital chart row matches Physical plus unlocked collateral.
| Leg | Amount | When |
|---|---|---|
| Maker locks | $70,000 collateral (accessible) | Match |
| Taker pays premium | $3,500 | Match |
| Taker pays notional | $70,000 settlement asset | Exercise only |
| Taker receives at exercise | Full collateral | Exercise |
| Buyer capital over lifecycle | $73,500 if exercised | Collateral unlocked |
05 · Access · Intrinsic
| Method | Access · Intrinsic |
| Layer | Oracle-gated · Intrinsic |
| Access | on (opt-in) |
Opting in unlocks direct access to the posted collateral for the option buyer until expiry. Exercise still follows Intrinsic: no notional, $7k delta from collateral.
| Leg | Amount |
|---|---|
| Maker locks | $70,000 collateral (accessible) |
| Taker pays at match | $3,500 premium |
| Taker pays at exercise | $0 settlement asset |
| Taker receives at exercise | $7,000 delta in collateral units |
| Buyer commits | $3,500 (premium only + collateral unlocked) |
Further reading
- Protocol Features · Settlement Methods — hooks and on-chain behavior
- Protocol Features · Borrowing — how Access is enforced
- The RFQ Lifecycle — committing a layer in
OptionDetails - Physical delivery · Cash settlement · Intrinsic value