Options

1. Introduction

Bitcoin Options traded are so called European style cash settled options.

"European style" means options on Deribit Exchange cannot be exercised before expiration, but can only be exercised at expiration. On Deribit this will happen automatically.
"Cash settled" means when a cash settled option is exercised the writer of the contract pays any profit due to the holder in cash rather than any asset transfer taking place.

The options are priced in BTC, but you can also see the relevant price in USD, using the latest futures prices to determine the price in USD (or Index if no future with same or earlier expiration is present). Also the platform shows you the Implied Volatility of the options price.

A BTC call option is the right to buy 1 bitcoin at a certain price (the strike price), and a put option is the right to sell 1 bitcoin at a certain price (the strike price).

2. Example (Options)

Example 1: You buy a call option with strike price 10,000 USD for 0.05 BTC. This is the right to buy 1 BTC for 10,000 USD. Imagine at expiration, the BTC index reaches 12,500 USD and expiration (delivery) price is 12,500 USD. Now this option will expire with a value of 2,500 USD, which is 0.2 BTC at a price of 12,500 USD for 1 BTC. So at expiration of the option your account will be credited with 0.2 BTC. Your initial purchase price was 0.05 BTC, your profit is 0.15 BTC

If you were the “seller” of the option, your account would be debited with 0.2 BTC at expiration.

Any call options with an exercise price (strike price) above 12,500 USD would expire worthless.

Exercise of in the money options at expiration happen automatically. You do not need to and cannot exercise an option your self, or exercise before expiration.

Example 2: You buy a put option with strike price 10,000 USD for 0.05 BTC. This is the right to sell 1 BTC for 10,000 USD. Imagine at expiration the delivery price is 5,000 USD. This option will expire with a value of 5000 USD, which is 1 BTC with BTC priced at 5,000 USD. So as owner of this option, your account will be credited with 1 BTC at expiration. Your purchased the option for 0.05 BTC, so your total profit is 0.95 BTC.

Example 3: You sell a put option with strike price 10,000 USD for 0.05 BTC. The delivery price at expiration is 10,001 USD. The option expires worthless. Buyer lost 0.05 BTC, seller won 0.05 BTC.

Example 4: You sell a call option with strike price 10,000 USD for 0.05 BTC. The delivery price at expiration is 9,999 USD. The call option expires worthless. Buyer lost 0.05 BTC, seller won 0.05 BTC.

3. Contract specifications options

  • Symbol: The symbol of an option consist of : “underlying-date-strike-c/p”, for example “BTC-30MAR18-10000-C” is a call option on 1 BTC, with strike 10,000 USD, exercised on 30th of March 2018
  • Underlying: Deribit BTC index. The index is composed of 6 leading BTC-USD exchanges, currently Bitfinex, Gemini, Bitstamp, GDAX, Kraken and Itbit. Every 6 seconds the index is calculated by taking average of bid-ask from those 6 exchanges, removing highest and lowest value, and then take the average of the remaining 4 values. This to reduce the risk of significant impacts of flash-crashes. Bitfinex is at this moment not active in the Deribit Index, leaving the other 5 exchanges.
  • Multiplier: 1  (The usual underlying of stock options is 100 shares. On Deribit exchange there is no multiplier. Each contract has as underlying only 1BTC (priced by Deribit BTC index)
  • Strike price intervals: depends on the current bitcoin price. Can vary between 500 USD and 2000 USD.
  • Strike prices: In-, at- and out-of-the-money strike prices are initially listed. New series are generally added when the underlying trades through the highest or lowest strike price available.
  • Premium Quotation: In BTC, .minimum tick is 0.0001 BTC (1/10000 BTC, or at exchange rate of 10000 USD/BTC that would be 1 USD/tick). On the platform the equivalent in USD is shown in the trading table, based on current BTC index price.
  • Expiration date: Each Friday, expiration at 08.00 UTC.
  • Exercise Style: European style with cash settlement. European style options can only be exercised at expiration date. This happens automatically on Deribit platform at expiration. No action from trader is required.
  • Settlement value: Exercise will result in delivery of BTC-cash immediately after expiration. The exercise-settlement value is calculated using the average of the Deribit BTC Index over the last 30 minutes before expiration. The exercise-settlement amount in US $ is equal to the difference between the exercise-settlement value and the exercise price of the option. To get the final amount in BTC, this amount gets divided by the exercise-settlement value (the average of the BTC-Index in last half hour of trading).
  • Mark price: Mark price is value given to the option by the risk engine during trading hours. I It is the average between bid and ask price whenever possible, but the price has to fall within limits set by Risk Management of Deribit. This is done by setting a minimum and a maximum of volatility implied by the option price (implied volatility). For example minimum 50% and maximum 80% implied annualized volatility. If the average of bid/ask at any time is above or below those values, those values will be used instead for the relative option. The mark price is also the valuation used for profit/loss calculations for open positions.
  • Position limits: Currently no position limits are in effect. Position limits are subject to change. At any moment Deribit could impose position limits.
  • Margin: Please refer to Margin Calculation
  • Trading hours: 24/7
  • Minimum order size: 0.1 option contract on 1 BTC

4. Margin Calculations

There are 2 types of margin calculated. Initial margin and Maintenance margin. Margin is calculated as the amount of BTC that will be reserved to open or maintain a position.

Long call/put
Initial margin: None
Maintenance Margin: None

Short call
Initial margin (BTC): Maximum (0.15 - Out of the Money Amount/Underlying MarkPrice, 0.1) + Mark Price of the option
Maintenance margin (BTC): 0.09 + mark price of the option

Short put
Initial margin (BTC): Maximum (Maximum (0.15 - Out of the Money Amount/Underlying MarkPrice, 0.1BTC) + markprice_option), Maintenance Margin)
Maintenance margin (BTC):Maximum (0.09, 0.09 * markprice_option) + mark_price_option

(*) Mark price of an option is the current value of the option as calculated by our risk management system. Usually this is the average between bid and ask, but for risk management purposes there are hard limits to this price. For example currently if the average between bid and ask of a certain option has an implied volatility higher than 106.00%, the mark price will be 106.00% implied volatility, and if the average of bid ask has an implied volatility lower than 60.00%, the mark price will be 60.00% implied volatility. Further if there is no market at all in an option (empty order book), the option will be valued at an implied volatility of (60.00%+106.00%)/2.

The percentages here are live percentages but can be changed by risk management without prior notice, depending on market circumstances.

Current mark price minimum IV: 60.00%  
Current mark price maximum IV: 106.00%

5. Portfolio Margin

Portfolio Margin uses a risk-based model that determines margin requirements based on historical volatility by valuing a specific portfolio over a range of underlying price and volatility moves. This Portfolio Margin risk-based model takes into consideration positions in futures and options combined, which may help reduce the margin requirement of your portfolio. Portfolio Margin accounts offer these potential benefits to traders and market makers who maintain a balanced portfolio of hedged positions:
  • Lower margin requirements
  • Increased leverage
Requirements:
  • To qualify for Portfolio Margin, you must maintain a minimum net equity of 1 BTC.
  • Trader needs to have some experience trading options and declare to have understanding about the concept of portfolio margin
Please contact us writing an email to support@deribit.com if you would like to have portfolio margin calculations activated in your account.

Portfolio maintenance margin is determined by calculating the maximum loss that can occur in a portfolio with the following parameters (parameter settings can be changed by Deribit Risk Management team without prior notice):
  • maximum price move of +/- 10.00%
  • maximum implied volatility change of SQRT (30/days to expiration)*26.00%. (Example: options expiring in 30 days: IV change of maximum 26.00%, options expiring in 15 days: IV change of maximum SQRT (30/15)*26.00%
  • Contingency component of 0.5% of underlying value of all options in portfolio. (Example: you have 200 options in your position (long and short), 0.5% of 200 BTC = 1 BTC is added to the portfolio margin calculation.
  • Contingency component of 1.50% of underlying value is added for offsetting futures. (Example: you are long 100 BTC in Future A, and short 100 BTC in Future B, then 1.50%*100 BTC will be added to the portfolio margin calculation.
  • Contingency component of 0.00% for VEGA’s offsetting in different expirations. (Example: you are net long 10 VEGA in Expirations A/B/C, and net short 10 VEGA in Expirations D/E/F, we will add a contingency of 0.00% thereof to the portfolio margin calculation.

Initial margin is Maintenance Margin + 30%. Example: If Maintenance Margin is 10 BTC, Initial margin will be 10 BTC+30% = 13 BTC.

Please note that the liquidation process for portfolio margin users targets to reduce the risk of your position by trading futures at first. This can also result in opening new futures positions but will reduce the risk profile of your position. Any options could also be traded, but only reducing positions, but due to the low liquidity in options market, liquidating options positions can be more hurtful than simply delta hedging the position with futures. Whenever maintenance margin is higher than 100%, it is to the discretion of Deribit risk management how to handle your position in an attempt to reduce the risk of bankruptcy.

For open orders there is no initial margin required. But per account there are individual limits to the amount of open orders that are allowed. If you (with PM activated) notice that would want to have more orders opened than risk management allows, please contact support.

6. Order types (Options)

Currently market and limit orders are accepted by the matching engine. Further an order can be checked as a “post-only” order (not available for advanced order types explained below).
A post-only order will always enter the order book without immediate matching. If your order would immediate match, our trading engine will adjust the order such that it will enter the order book at the next best price possible. (for example if you place a buy order at 0.0050 BTC, but there is an offer for 0.0045 BTC, the price of your order will be adjusted to 0.0044 BTC automatically, such that it will enter the order book and will be a maker order.

For options trading the platform supports 2 advanced order types. The order book keeps prices in BTC, the options are priced in BTC. But it is possible through the order form to submit volatility orders and constant USD value orders.

Filling the options order form, you can choose to determine the price in 3 ways: giving the price in BTC, giving the price in USD, and giving the price in Implied Volatility.

In the case of USD price and Implied Volatility price, the Deribit engine will continuously update your order as to keep respectively the USD value and the Implied Volatility at the fixed value as given in the order form. IV and USD Orders are updated once per 6 seconds.

Fixed USD price orders are useful when a trader has decided that he wants to pay X dollars for a certain option. Due to changing exchange rate of USD and Bitcoin, this value is not constant in BTC. But as the order book works only with BTC (there is no other currency on the platform), to keep the same value in USD for your order, the order will be continuously monitored and edited by the pricing engine. The Deribit Index is used to determine the BTC price of the option in case there is no corresponding Future expiring on the same date. If there is a corresponding future, the mark price of the future will be used, though the future mark price is not allowed to move too far away from the Index (there is a circuit braker such that value used for USD/IV orders cannot differ more than around 10% from the Index)

Volatility orders are yet a more advanced type of order, where the implied volatility of the order will remain constant. This makes it possible to even make markets in some options series without further market maker applications. Automatic hedging with futures is currently not yet supported but is on the roadmap. Black-Scholes model or european options is used to determine prices. Please note that prices are updated max once per 6 seconds.

Fixed USD and Volatility orders can be changed by pricing engine maximum once every 6 seconds, because Deribit index updates every 6 seconds. If there is a corresponding Future, the future will be used as input for calculating IV orders and USD orders.

7. Historical volatility chart

Following this link you can see a chart of the development of the annualised 15 days historical volatility of the Deribit bitcoin index.
Volatility is calculated by taking once a day at a fixed time the value of the index. The (annualised) bitcoin historical volatility is calculated over a period of 15 days.

8. Mistrade rules

Due to various reasons it can happen that options are being traded at prices that can be regarded as having taken place in an abnormal non orderly market, where the chance is very high that one side of the trade has been done unwillingly. In such cases Deribit might adjust the prices.

Price adjustments of option trades will be only done if the traded price of the option was further away from the theoretical price of the option than 5% of the underlying (0.05BTC for BTC options). For example if an option is traded at a price of 0.12BTC and its theoretical price is 0.05BTC, trader can request for a price adjustment to 0.10BTC.

If a trader realises a trade executed at a price regarded as being mis-priced, he should write an email to the exchange (support@deribit.com) asking for a price adjustment.

The theoretical price of the option is the mark price, though it is difficult for the exchange to at all times have the mark price exactly at theoretical prices. So in case of disagreement about the theoretical price, this price will be determined consulting primary market makers on the platform. Deribit will follow their recommendations as for what was the theoretical value of the option at the moment of trade.

A request for a price adjustment of a trade has to be made within 2 hours after the moment of trade.

9. Market Making Obligations

The matching engine and risk engine are built from the ground up to be able to absorb huge amounts of orders in a very short period of time, an absolute must for any serious options exchange due to the large amount of assets. The platform is able to handle thousands of order requests per second with ultra low latency, via REST, Websockets and FIX api.

Please note that at this moment we cannot accept new market markets. (others than those with whom we are communicating and are already preparing to connect).

Market maker obligations:

1. MM is obliged to be showing quotes in the market 56 hours per week. If a market maker choose to quote less than 100% of the time, he would have to indicate to the exchange at which times he will be market making. This schedule should be constant and not continuously changed. In the chosen time schedule the market maker is obligated to quote 90% of the time. Of course a market maker is always allowed to quote also outside indicated schedule. Quoting a 2 sided markets outside of allowed bandwidth outlined below is not allowed at any time.

2. Instrument coverage:
Market maker has to quote all expiries, and 75% of all option contracts with delta between 0.1 and 0.9 in absolute terms.

3. Max allowed bid-ask spread.
Under normal conditions default max allowed bid-ask spread should be max of [0.01, (delta of the option) * 0.04].
(Delta of the option = BS delta as calculated by Deribit - mark price as calculated by Deribit).
As an example, monthly ATM calls should be quoted not wider than 0.02, delta 1.0 put should be quoted not wider than 0.04 etc.

Exceptions:
* max spread for options with expiries 3-6 months can be 1.5 times the default max spread;
* max spread for longer-term options, expiring in 6 months+, or for options for which no respective future with a liquid market exists on Deribit platform, can be 2 times the default spread;
* max spread for newly introduced series with expiry > 1 month is double the default max spread for the period of 5 days after the introduction of the new expiry;
* max spread for newly introduced series with expiry < 1 month is double the default max spread for the period of 1 day after the introduction of the new expiry;
* In fast market max allowed spread can be double the required spread for normal conditions; Whenever fast market conditions are met, in the header of the Options table will be shown in red the words "Fast Market" (10% move in past 2 hours).

4. Minimum quote size: 2 lot for options with delta 0.50 and below, 1 lot for higher delta.

5. Fast market: 10% move in the past 2 hours.

6. No diming. A party gaining extra capacity for quoting is not allowed to consistently alter his orders in reaction to changes in other participants' orders to improve them by a small amount, as opposed to changing orders based on own market view.