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 or ETH, 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).
An ETH call option is the right to buy 1 ethereum at a certain price (the strike price), and a put option is the right to sell 1 ethereum at a certain price (the strike price).

2. Example (Options)

Example 1: You buy a call option with strike price $10,000 for 0.05 BTC. This is the right to buy 1 BTC for 10,000 dollars. Imagine at the time of expiration, the BTC index reaches $12.500 and expiration (delivery) price is 12,500 dollar. Now this option will settle with a value of 2,500 USD, which is 0.2 BTC (2,500/12,500 = 0.2) at a price of 12,500 dollar 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 dollar would expire worthless.

Exercise of in the money options at expiration happens 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 5,000 USD, which is 1 BTC with BTC priced at 5000 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.

3.1 BTC Options Contract specifications 

  • 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, exercised on 30th of March 2018
  • Tick size: 0.0005BTC
  • 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 or short squeezes on those exchanges. 
  • Multiplier: 1  (The usual underlying of stock options is 100 shares. On Deribit exchange there is no multiplier. Each contract has as underlying of only 1BTC (priced by Deribit BTC index)
  • Strike price intervals: depends on the current bitcoin price. Can vary between 250 USD and 5,000 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 0.0005 BTC (5/10,000 BTC, or at exchange rate of 10,000 USD/BTC that would be 5 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 settlement in BTC 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 strike 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. 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.
  • Allowed trading bandwidth around the mark price. A buy order can have a price not more than 0.04BTC higher than the mark price of the option and a sell order can have a price not more than 0.04BTC lower than the mark price.
  • 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

3.2 ETH Options Contract specifications 

  • Symbol: The symbol of an option consist of : “underlying-date-strike-c/p”, for example “ETH-30MAR18-100-C” is a call option on 1 ETH, with strike 100, exercised on 30th of March 2018
  • Tick size: 0.001 ETH
  • Underlying: Deribit ETH index. The index is composed of leading ETH-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 or short squeezes on those exchanges. 
  • Multiplier: 1  (The usual underlying of stock options is 100 shares. On Deribit exchange there is no multiplier. Each contract has as underlying of only 1 ETH (priced by Deribit ETH index)
  • Strike price intervals: depends on the current Ethereum price. Can vary between 1 USD and 25 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 ETH, minimum tick is 0.001 ETH (1/1000 ETH, or at exchange rate of 1000 USD/ETH that would be 1 USD/tick). On the platform the equivalent in USD is shown in the trading table, based on current ETH index price.
  • Expiration date: Every 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 settlement in ETH immediately after expiration. The exercise-settlement value is calculated using the average of the Deribit ETH 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 strike price of the option. To get the final amount in ETH, this amount gets divided by the exercise-settlement value (the average of the ETH-Index in last half hour of trading).
  • Mark price: Mark price is value given to the option by the risk engine during trading hours. 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: 1 option contract on 1 ETH
  • Allowed trading bandwidth around the mark price. A buy order can have a price not more than 0.04 ETH higher than the mark price of the option and a sell order can have a price not more than 0.04 ETH lower than the mark price.
  • 4. Margin Calculations
  • There are 2 types of margin calculated. Initial margin and Maintenance margin. Margin is calculated as the amount of BTC or ETH 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): 0.075 + mark price of the option

    Short put
    Initial margin (BTC): Maximum (Maximum (0.15 - Out of the Money Amount/Underlying MarkPrice, 0.1 )+ markprice_option, Maintenance Margin)
    Maintenance margin (BTC):Maximum (0.075, 0.075 * 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. At any time Deribit risk management sets hard limits to the minimum and maximum implied volatility allowed as mark price. For example if those settings would be 60% min and 90% max, then any option with midprice with IV higher than 90%, will be markpriced at 90% IV, and any option with midprice lower than 60% IV would be priced at 60% IV. Note that 60% and 90% are merely example percentages, real percentages will vary and are at the discretion of Deribit Risk management

    5. Portfolio Margin (available upon request)

    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 0.5 BTC or 15 ETH.
    • 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):
    • BTC: maximum price move of +/- 10.00%
    • ETH: maximum price move of +/- 15.00%
    • maximum implied volatility change of (30/days to expiration)^0.30*23.00%. Example: options expiring in 30 days: IV change of maximum 23.00%, options expiring in 15 days: IV change of maximum  (30/15)^0.30*23.00%
    • Contingency component of 0.01 BTC per option for all net short options per strike. Example: you have a position in strike X, call +10 and put -20, your net short position on strike X is -10, thus 10*0.01 BTC extra margin requirement is added to the portfolio margin calculation.
    • Contingency component of 0.60% 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 0.60%*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 you would want to have more orders opened than risk management allows, please contact support@deribit.com.

    6. Order types (Options)

    Currently "market with protection" 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 breaker 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 for 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

    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. Mis trade 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 or execute reversing trades.

    Price adjustments or executing reversing trades 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 as soon as possible.

    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 if there is any disagreement.

    A request for a price adjustment of a trade has to be made within 2 hours after the moment of trade. If for whatever reason the counterparty already made a withdrawal of funds, and Deribit is not capable of retrieving enough funds from counterparty, price adjustment will only be made for the amount that was retrievable from counterparty account. The insurance fund is not meant and will not be used for funding mis-trades. 

    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 makers (others than those with whom we are communicating and are already preparing to connect).

    Regarding market maker rules explained below, anybody placing quotes (bid and ask) in same instrument or any trader having more than 20 options orders in the book via automated trading (via API) can be regarded as a market maker and can be forced to comply with the rules below.

    Market maker obligations:

    1. MM is obliged to be showing quotes in the market 112 hours per week. 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 90% 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, abs(delta * 0.04)].
    (Delta = BS delta as calculated by Deribit - mark price in BTC 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 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 1.5 times the default spread;
    * max spread for newly introduced series with expiry > 1 month is 1.5x 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 1.5x 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.

    4. Minimum quote size: 5 lots for options with effective 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 (with more than 20 open orders) 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.

    10. Deribit Bitcoin Options Cheat Sheet