Options Documentation

1.Options

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 index price to determine the price in USD. Also the platform shows you the Implied Volatility of the options price.

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

1.1.Example (Options)

Example 1: You buy a call option with $300 strike price for 0.01BTC. This is the right to buy 1 BTC for 300 dollars. Imagine at expiration, the BTC index reaches $400 and delivery price is 400 dollar. Now this option will expire with a value of 100USD, which is 0.25BTC at the price of 400 dollar. So at expiration of the option your account will be credited with 0.25BTC. Your initial purchase price was 0.01BTC, your profit is 0.24BTC

If you were the “seller” of the option, your account would be debited with 0.25BTC at expiration.

Any call options with an exercise price above 400 dollar would expire worthless.

Example 2: You buy a put option with strike price $300 for 0.01BTC. This is the right to sell 1BTC for 300 dollar. Imagine at expiration the delivery price is 200 dollar. This option will expire with a value of 100USD, which is 0.5BTC with BTC at $200. So as owner of this option, your account will be credited with 0.5BTC at expiration. Your purchased the option for 0.01BTC, so your total profit is 0.49BTC.

Example 3: You sell a put option with strike price $300 for 0.01BTC. The delivery price at expiration is $301. The option expires worthless. Buyer lost 0.01BTC, seller won 0.01BTC.

Example 4: You sell a call option with strike price $300 for 0.1BTC. The delivery price at expiration is $299. The call option expires worthless. Buyer lost 0.1BTC, seller won 0.1BTC.

1.2.Contract specifications options

  • Symbol: The symbol of an option consist of : “underlying-date-strike-c/p”, for example “BTC-5JUL16-650-C” is a call option on 1BTC, with strike 650, excercised on 5th juli 2016
  • Underlying: Deribit BTC index. The index is composed of 5 leading BTC-USD exchanges, currently Bitfinex, Okcoin-USD, Bitstamp, Coinbase and Itbit. Every 6 seconds the index is calculated by taking average of bid-ask from beforenamed 5 exchanges, removing highest and lowest value, and then take the average of the remaining 3 value. This to reduce the risk of significant impacts of flash-crashes.
  • 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: US $10 for weekly and bi-weekly options and US $20 for options with expiration dates further away.
  • 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 0.0001BTC (1/10000 BTC, or at exchange rate of $700/BTC that would be $0.07/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 15.00 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 annualised 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

1.3.Margin Calculation

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

Long call/put  
Initial margin Mark Price (*) of the option
Maintenance Margin same as Initial Margin

 

Short call  
Initial margin

Maximum ((20%  * Underlying Price – Out of the Money Amount), 
(10% * Underlying Price)) 

Maintenance margin 10% * Underlying Price

 

Short put  
Initial margin

Maximum ((20%  * Underlying Price – Out of the Money Amount), 
(10% * Underlying Price)) 

Maintenance margin 10% * Underlying Price

 

(*) Mark price of an option is the current price 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 80%, the mark price will be 80% implied volatility, and if the average of bid ask has an implied volatility lower than 50%, the mark price will be 50% 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 65%.

The values 50%, 65% and 80% can be changed by risk management without prior notice, depending on market circumstances.

1.4.Order types (options)

Currently only limit orders are accepted by the matching engine.

Though 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.

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.

Volatility orders are yet a more advanced order form, 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.

Fixed USD and Volatility orders can be changed by pricing engine maximum once every 6 seconds, because Deribit index updates every 6 seconds.

1.5.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.

1.6.Market Making

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.

Though the platform and its API is accessible to everybody, traders that want to operate as market makers on Deribit Exchange should contact us.

 

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