The last few weeks Deribit has undergone some major changes as a preliminary step to our Roadmap of 2019. Here is a short summary of the biggest changes so far:
The first of its kind – ETH options (European style, Cash settled)
New User Interface
More intuitive, better looking and prepping some backend stuff for UI v3 which will come soon.
As requested the mark price is now added to the options UI
All positions, orders and/or stops for all futures and perpetual contracts can be shown together on one tab from now on.
New Chart settings
User can easily swap between wide or small chart or completely hide it. Orders and stops are visible on the chart and by moving them around the orders can be visually edited.
Drawings and indicators can be saved on the charts
We have added the trigger Last Price to our repertoire of stop-order settings
All positions now entered in USD rather than contracts
To create coherence between BTC and ETH (and any future implementation) we changed the size of the orders to the USD value of the order instead of the former contracts. BTC is traded per $10 and ETH per $1
The new API v2 is the tool for the future. Together with the launch of our ETH products we launched a new API. The old API v1 will be supported but will not be upgraded with any future implementation on Deribit.
For stops a trader needs a trigger price. Today Deribit introduces the trigger last-price. On Deribit the mark-price, index-price and last-price can be used as trigger prices. All have their specific usage and a trader can use them specifically for the according scenario. With the introduction of the trigger last-price, this trigger will be set as default. A trader needs to make sure the right trigger is selected when setting up a stop.
The trigger Last-price
The trigger last-price is a direct connection to market movements on our exchange. Just like the name says it triggers on the last traded price. Stop-limits can have the limit orders tight but when a market is moving they do not guarantee to be filled. With a stop market the order guarantees a fill however the price is not guaranteed.The trigger last-price makes sure it will be triggered by the trading events in our orderbook. The danger of the trigger last-price is that wicks caused by fat-fingers, stop-hunts or other deep executions will cause the stop to be triggered, without having the security the overall price of the asset stays on that level.
The trigger Mark-price
As the mark price is calculated with a dampener it follows the orderbook and is not at risk for wicks created by fat finger orders, deep executing stops and other orders. The mark price is calculated as (Mark Price = Deribit Index + 30 seconds EMA (Fair Price — Deribit Index)). It is the mark price that is used for the PNL calculations as well as being used to check any open position for the risk of a possible liquidation. Using this trigger to place a stop to exit before a liquidation can be executed is a safe approach if not placed too tight. However in rapid market movements the mark price will be behind the last traded price due to the dampener so a trader needs to keep in mind that the actual traded price can have a distance from the mark price when their stop is triggered.
The trigger Index-price
The index price is the average of several exchanges. As futures trade on a premium or discount this trigger price needs to be handled a bit different. By using the index as a trigger on futures, this premium or discount can be taken into account automatically. Using the index-price as a trigger for a stop to exit will always trigger relatively late and it is not recommended to use this to exit an position. Please take note that if you use the trigger Index-price while trading a future with a premium or discount the indexprice is not equal to the marketprice, keep this in mind when deciding what trigger to use for futures.
For entries in both futures and perpetual contracts the index-price as trigger is a good tool. In price movements of the asset the average of several exchanges will follow slower due to the nature of being an average. So if a stop is used for opening a position the index price as trigger can be used, for example, to wait for a confirmation of a break out as the average price of all the exchanges we use for our index-price need to be at that level. A trader needs to keep in mind that the orderbook will move before this average is reached and thus placing a limit-order tight to the trigger probably will not be filled.
As Deribit has introduced reduce-only orders a trader can always set-up a combination of stops with the different triggers. Exit stops with reduce-only enabled can be setup with three stops, one with trigger last-price, one with trigger mark-price and one with trigger index-price. Each with their own conditions, if index price reaches X then exit, if mark-price reaches… etc. The first stop that will be triggered will close the position and reduce-only makes sure the other stops won’t open a new position. Of course it is not needed to use one stop to close the complete position. A trader can divide the quantity to execute per stop and like previous example simply choose to close one third.
Deribit has a firm belief in the future of cryptocurrencies, and the important role a liquid option market has in the health and growth of the market as a whole. An options market is comprised of a large number of order books and needs to be capable of handling thousands of requests per second. This is why Deribit has focused so heavily on the underlying technology and developing a platform capable of handling this load.
Product development is also very much centered on what customers will find useful, and indeed it is very common for upgrades to be based directly on customer requests. The telegram group has become an excellent way for traders to have direct access to Deribit staff 24 hours a day and give real-time feedback.
With the recent launch of Ethereum derivatives on Deribit it’s about time we had a look at what else is coming down the pipeline in 2019. So far this year has seen the launch of ETH products (perpetual swaps, futures and options), reduce only stops enabling much more convenient position/risk management and v2.0 of both the UI and API.
So what’s next?
Layout v3.0
Despite only recently launching v2.0 of the user interface to accommodate new currencies, the next version is already largely developed and should be ready for release in the next couple of months. This will bring a completely customisable layout allowing users to reposition and resize every element of the trading screen. It will also bring a depth chart to the futures and the ability to see the order books, recent trades, current positions and order form on the same page as the option chain without the need for a pop up.
Here’s a sneak peak at the type of screen you will be able to create with the v3 layout. You can create new rows or columns and drag/drop each element wherever you like. And you can even have several elements in the same area using tabs.
And the new option layout will have similar capabilities as shown below.
Mass Quote Protection
There are around 100 different strike price/expiry date combinations on Deribit at any given time, and that’s just for Bitcoin. Then consider that each one of these has both a put and a call, and a bid and ask. That is a lot of instruments that the liquidity providers need to quote on simultaneously.
Mass quote protection allows the market makers to quote larger size on each instrument without being overly exposed to the risk of having every order hit at once. As a simple example say an account is protected for anything over 500 contracts, once 500 contracts of that accounts orders have been hit in a given time period the rest of their orders will be cancelled, allowing them time to hedge or reposition the rest of their orders accordingly.
This will not only protect the liquidity providers from taking on positions too large for them in a short space of time, but will also allow for considerably better liquidity across the whole option chain which will benefit all traders.
Block Trade Functionality
A block trade helps two parties who wish to transact larger size to do so privately without exposing themselves to risk on the public order book. They both agree on a price and this is then executed in full without the need for either party to place the order on the order book. This will make the process of executing large privately arranged trades considerably easier.
Deribit Analytics
The more information available to traders the better decisions they can make. With this in mind Deribit is developing a separate analytics website that will offer a range of new tools based on live data from Deribit. This will include volume, option statistics, historical funding data, equity charts and volatility data. The analytics site will provide all traders with useful data that is relevant to their trading decisions.
Education Tracks
Educating users on how to use the platform and also how to trade the derivatives on offer is extremely important to Deribit. Derivatives can have a steep learning curve, particularly options. The goal is to create an education resource that will make Deribit accessible and easy to use for as many people as possible. Reducing any barrier to entry by providing all the resources anyone could need to get the most out of the platform.
Additional Currency Listings
While bitcoin is still king in the cryptocurrency space with a market share of around 50% at time of writing, there is serious and growing demand for additional currencies. The ETH product development brought with it several important upgrades. The new user interface and API have now moved from being a single currency system to supporting multiple currencies. This means adding more currencies in future will be a more streamlined process.
Advanced Order Types
Deribit users already have access to limit orders, market orders, stops (both limit and market), post only, hidden and reduce only order types. But more advanced order types are also planned for the future. Advanced order types such as One Cancels Other (OCO) and trailing stops will give traders even more flexibility in how they structure their trades, and more freedom to step away from the screen knowing their orders will execute exactly as they intend.
The Future On Deribit
With these upcoming features and continued development Deribit intends to remain at the forefront of the crypto derivatives market by giving traders all the tools they need.
And it’s not just the platform itself that is being improved. The Deribit team is also continuing to expand, providing support in more languages, expanding into new markets and developing strategic partnerships and integrations with other companies and software providers.
2019 has been a very successful year so far and there is plenty more to come in the very near future.
San Francisco, March 19 – Caspian, the full-stack crypto trading, portfolio and risk management platform for professional traders and investors, today announced that it has integrated its platform with Deribit, a leading crypto options and futures exchange, to become the first institutional platform to offer both options and futures trading in these asset classes. Caspian adds Deribit to its ecosystem of over 30 major crypto exchanges and liquidity providers.
Caspian’s fully-developed trading and portfolio management system includes an OEMS, PMS, and RMS that covers the entire lifecycle of the trade. The system is the only platform for both options and futures in one interface and connects into all major crypto exchanges and OTC brokers. It is a complete suite of sophisticated trading algorithms, real-time and historical P&L and exposure tracking with industry leading professional customer service.
As crypto trading has been increasingly adopted by institutional investors, so too has the trading of crypto options and futures. Launched in 2016, Deribit provides a highly liquid marketplace for trading Bitcoin options and futures and Ethereum options, futures and Deribit Perpetual. Deribit also offers traders free deposits and withdrawals, up to 100x leverage and competitive trading fees. The Caspian platform connects to Deribit through an advanced API that supports high volumes with ultra-low latency and provides clients with access to the exchange’s full options order book.
“We are excited to be working with Deribit to make the trading of crypto options and futures possible within the institutional community,” commented Robert Dykes, CEO of Caspian. “Our goal at Caspian is to provide crypto traders and investors the same standard of tools and service that exist in the traditional markets and its great knowing that the team at Deribit is working towards the same high standards.”
“Caspian’s comprehensive trading and portfolio management platform provides institutional investors with the market-leading gateway to the crypto markets,” said John Jansen, CEO of Deribit. “We’re thrilled to be working with the team at Caspian.”
About Caspian
Caspian is a full-stack crypto asset management platform tying together the biggest crypto exchanges in a single interface. The platform also offers compliance, algorithms, portfolio management, risk and reporting tools. Led by an experienced team and leveraging the capabilities and resources of two existing, successful financial businesses, Caspian has built a crypto ecosystem that enables sophisticated traders to operate more efficiently and improve their performance.
Deribit launched in June 2016 after several years of development. John Jansen, the original founder teamed up with Marius Jansen and Sebastian Smyczýnski. Deribit started as a Bitcoin Futures and Options trading platform based out of Amsterdam, The Netherlands. Deribit was created as an answer to those in search of a professional fully dedicated cryptocurrencies futures and options trading platform.
Our service enables the user to create a fully liquid marketplace to the same standards as a traditional derivatives market. The framework of the platform has been developed to assure the ability to handle very large numbers of requests with ultra low latency (<1 ms). We developed our own matching engine from scratch and all of our technology is proprietary. We believe in Bitcoin and in the future of cryptocurrencies. We expect millions of traders will be trading cryptocurrencies at any given moment in time soon, and our platform is built with the potential to eventually serve those millions of users at the same time with real time low latency data.
Deribit is the only exchange in the world offering European style cash settled options on Ethereum. We are also working on creating more advanced features such as; block trades and mass quote protection.
As many of our users have requested we have now introduced reduce-only orders on our exchange.
We provide this feature on all of our orders and traders can use reduce-only with market and limit-orders as well as stops. When the trader enables reduce-only the order can only close contracts in a position. The orders will only function as an exit and so, reduce-only ensures less maintenance for traders.
Limit-orders with reduce-only
To make sure we don’t have orders that can’t be filled in the orderbook limit-orders with the reduce-only feature enabled can never exceed the amount of open contracts on the future the reduce-only order is placed. Our system will automatically adjust the quantity of contracts to the quantity of open contracts.
If part of a position is closed by any other means than the reduce-only order, the reduce-only order will be automatically adjusted downwards.
If the trader decides to increase their position before the reduce-only order is executed the quantity of the reduce-only order will not increase as well. The trader will need to adjust this themselves if wanted.
If a trader already has a reduce-only order placed and a new reduce-only order is placed in front of that the quantities will be adjusted so that the open quantity of all reduce-only orders will never exceed the quantity of open contracts. The first reduce-only order that can execute is key, all other reduce-only orders behind that will adjust so that the total quantity of contracts in reduce-only orders will never exceed the quantity of contracts in an open position.
Example of automatic adjusting of reduce-only order:
A trader has a long position on Perpetual BTC/USD of 10.000 contracts with an average price of $3900 and the most recent price is going sideways at $3950.
The trader has a limit-sell (take-profit) with reduce-only set for 5000 contracts at $4100 (order 1).
The trader has a limit-sell with reduce-only set for 5000 contracts at $4050 (order 2).
Now the trader places a limit-sell with reduce-only for 8000 contracts at $4000 (order 3)
As order 3 is the first that can execute this quantity is the key. As there are only 10.000 contracts in an open position for the trader the reduce-only order 2 will adjust to 2000 contracts (10.000 – 8.000). Order 1 will cancel as all contracts in the open position will be closed when both order 1 and order 2 are executed.
Market-orders with reduce-only
A trader may wish to close a position with a market-order. Any quantity can be filled in and the market-order will, when executed, automatically adjust the quantity downwards and only close a position.
Stops with reduce-only
As a stop is not an order in the orderbook until it is triggered a stop can be set up with reduce-only while exceeding the quantity of contracts that is open on the asset. As soon as the stop is triggered the quantity is adjusted downwards to the quantity of open contracts. If it is a stop-market the position will be reduced by the quantity given in the stop but the stop will never open a position. If it is a stop-limit, the limit-order will be adjusted downwards to the quantity of open contracts or if the quantity given in the stop is lower than the open quantity it will use the given quantity.
With the use of a stop (loss) with reduce-only enabled a trader can set up their stop (loss) before their limit entries are filled and ensure the loss exit.
API – close position.
All previous mentioned orders can be set up with the API as well but we have an additional order. The command /private/close_position will close the open order. It can be done both as limit-order as well as market-order. Executing this command will close the position and if it is executed as limit-order it will place a reduce-only order for the open quantity.
A simple example how reduce-only can be used:
A trader opens a long position on the BTC/USD pair with an average price of $3900.
The trader places a limit-sell order with reduce-only with a limit-price of $4000.
The trader sets a stop-loss with reduce-only that triggers a market-sell at $3800.
No matter what the market does the trader knows his position will be closed at either $3800 or $4000 and there is no chance of opening a new position.
If the market would push the price of BTC to $4000 the limit-sell of the trader would close the position in profit. If $4000 gets ultimately rejected and the markets dumps the price to $3750 the stop would trigger but not execute any order as there is no position to reduce.
In the crypto space a lot of people think that a market maker is a trader, or a group of traders, with a large amount of capital and a directional bias who is able to push the market around. In other words their orders or trades are so large that they are capable of moving the price significantly to suit their needs. While maybe these type of traders do exist, it’s not what a market maker is.
As the name suggests a market maker is someone who makes a market by giving buy orders and sell orders for others to trade against. They quote both sides of the market and are making money from the spread between their buy and sell price. Often they arbitrage their trade at another exchange: buy low and sell high at almost the same time. Others might be running strategies that buy and sell at a high frequency. They are mostly non directional liquidity providers. They do not necessarily care if the price goes up or down and simply want to have their bids and asks hit as many times as possible so on each trade they can make a small profit.
As you might imagine the profit per trade doing this is going to be much lower than for example swing trading large percentage moves. However the risk is also much lower (hedging where necessary). And it’s all about volume! Repeating the process many times for small but consistent gains.
Market Making on Deribit
Deribit does not have an in house trading desk. All market makers on Deribit are third parties. They are a vital part of the ecosystem as they provide liquidity around the clock on instruments that would otherwise have books too thin for many people to trade effectively.
What Market Makers Do and Don’t Get on Deribit
Much has been written about markets being manipulated on various Bitcoin exchanges. It is one of the disadvantages of non regulated exchanges; there’s no transparency and an exchange can give certain traders or desks a trading advantage. Despite Deribit not being regulated today, we can assure you no traders have any trading advantage over others.
Depending on volume, market makers may get a custom agreement on fees and help setting up. In exchange for this, and depending on what instruments they are quoting on, there will be certain rules they must follow as well. These rules will include a minimum percentage of time they must be quoting, how many instruments are covered, maximum bid/ask spreads and minimum quote sizes.
It’s also worth noting that market makers on Deribit do not get access to any insider information that isn’t available to other users, and they also do not get preferential order queuing or access to any special features/order types not available to everyone else.
Market Making on the Deribit trading engine
Deribit offers more than 100 strike price/expiry price combinations in the Bitcoin options market. Each of these has both a call and a put and each of those can be both bought or sold: we’re talking about 400 orders in the books that need to be updated every instance the Bitcoin price changes. One can imagine all these prices need to update as fast as possible by the market makers and thus needs a very responsive and robust trading engine.
Co-location
Market makers, as well as other larger traders and people using automated systems, may also choose to have their software located as close to the Deribit servers as possible. This will give their systems the lowest latency possible. While Deribit doesn’t offer any specific co-location services, the server location is displayed on the website enabling traders to install their trading software in the best possible location. This should give a latency of less than 1 ms to our servers. The server is currently located in the OVH data center SBG1 in Strasbourg, France.
Market Makers on Deribit
QCP Capital
QCP Capital is a crypto trading firm based in Singapore. Besides proprietary trading, QCP runs an OTC desk that covers spot, forwards and options 24/7.
Darius Sit, managing partner at QCP Capital: “Deribit is an ideal trading platform with a user-friendly UI that makes for efficient trading. For option trading specifically the optimal margin terms, amiable community and approachable management allows us to effectively execute our strategies.
As an OTC-focused desk we are looking forward to a feature where we would be able to cross customised contracts with our counterparties. Using Deribit as a central settlement platform would greatly benefit our options franchise business. We are also looking forward to trading options on ETH and other coins as well.”
Magpie Capital
Magpie Capital is a fund that specializes in cryptocurrency derivatives trading.
Darshan Vaidya, CIO of Magpi Capital: “This a sector that we believe still has plenty of room to grow as the market becomes more sophisticated. Whilst still in its nascent stage, we believe options can be a huge part of providing stability to existing market participants and new entrants into the space.
Deribit has been a visionary in terms of spotting this need in cryptocurrency markets at a very early stage, and is an established exchange that has proven to be dynamic, reliable, and focused on improving its user experience, for both professional firms and individual users.
As well as introducing more asset classes to trade futures and options on, we believe it’d help institutional hedgers and speculators if Deribit included a Blocking mechanism for larger trades, and the ability to trade and quote strategies of options (combinations of different outright options). Stablecoin settlement further down the road may also increase the ability to add more asset classes more easily.”
XBTO
XBTO is a world leader in digital asset trading and investing.
Philippe Bekhazi, CEO of XBTO: “We primarily develop tools and algorithms to provide high quality liquidity to the world’s digital asset markets, in spot and derivatives. We’re also an investor in the digital asset space.
Due to Deribit’s excellent technology stack, differentiated product lineup and its prudent approach to risk management, XBTO has been an early mover in providing market making flow to Deribit’s various order books.
Certain key features such as block trading and RFQ for complex option structures will be critical to increasing volumes and for furthering customer satisfaction. In the future it will be interesting to see how Deribit can evolve into a globally regulated crypto-derivatives exchange.”
Closing words
Deribit already has plans for some of these additional features in the pipeline that will make both market makers and regular traders lives much simpler, particularly for larger or multi-legged options positions. And with more currencies currently in the process of being added there will be even more instruments that need quoting in future. So there is plenty room for growth, both for Deribit itself, traders using the platform and the general Bitcoin investment space.
If you have any questions at all feel free to comment on Twitter, join our Telegram group (https://t.me/deribit) or send us an e-mail at support@deribit.com.
If you are new to Deribit you can take a look and sign up here: https://www.deribit.com/login?#/register. And for anyone wishing to try the platform out without putting any capital at risk, including any automated strategies, you can find the test site at https://test.deribit.com.
Butterflies and Condors So far each of the positions we’ve looked at has still only had 2 legs in it. Now we’ll look at some non directional positions that have 4 different legs in one single position. First iron butterflies and then iron condors.
Before we do that it’s worth quickly mentioning that there is some disagreement about which side to label long and which to label short for iron butterflies and iron condors. The definition we will use in this article is that if the position is established for a net credit (i.e. you receive a premium for opening the whole position) then we’ll consider that selling to open the position and therefore label it the short side. Conversely if the position is established for a net debit (i.e. you pay a premium for opening the whole position) then we’ll consider that buying to open the position and therefore label it the long side. No matter which way round you label it there is no effect on the P/L, but it’s worth being aware of when conversing with someone about iron condors and iron butterflies to make sure that you both understand which side you are talking about.
Iron Butterfly
One way to think of iron butterflies and iron condors is they are risk defined versions of straddles and strangles respectively.
You can also think of an iron butterfly as a combination of a call spread and a put spread, with the lowest strike in the call spread and the highest strike of the put spread both at strike B.
Opening a Long Iron Butterfly
The current price will typically be at or near strike B.
You are selling a put at strike A, buying a call and a put at strike B, and selling a call at strike C
Your risk is limited to the net debit paid to establish the position.
Your position will stop making gains once the price gets down to strike A or up to strike C, so your profit is also limited.
This position is similar to a long straddle, but you have limited your maximum profit in exchange for an overall cheaper position due to collecting some premium by selling the put at strike A and the call at strike C.
You are longing volatility. You want implied volatility to increase once the position is opened as it will increase the value of your position.
Ideally you want the price to expire either below A or above C.
Opening a Short Iron Butterfly
The current price will typically be at or near strike B.
You are buying a put at strike A, selling a call and a put at strike B, and buying a call at strike C
Again your risk and maximum profit are defined.
This position is similar to a short straddle, but you have limited your risk by purchasing the OTM options at strike A and C.
You are shorting volatility. You want implied volatility to decrease once the position is opened as this will decrease the value of the options you have sold. A sideways ranging market would be ideal for you.
Ideally you want the price to expire at strike B
Bitcoin Iron Butterfly Example Using the spreadsheet I have constructed both a long and short iron butterfly. The long iron butterfly consists of the following legs: -1 put with a strike price of 3000 and price of 0.05BTC +1 put with a strike price of 3500 and price of 0.1BTC +1 call with a strike price of 3500 and price of 0.1BTC -1 call with a strike price of 4000 and a price of 0.05BTC
The short iron butterfly consists of the following legs: +1 put with a strike price of 3000 and price of 0.05BTC -1 put with a strike price of 3500 and price of 0.1BTC -1 call with a strike price of 3500 and price of 0.1BTC +1 call with a strike price of 4000 and a price of 0.05BTC
The middle two options in bold are the same as the straddle from part 1, and the other two options are called the wings. These are the legs that turn it into an iron butterfly, defining the risk for sellers and profit for buyers.
This example will be left in the downloadable version of the sheet under the name ‘Iron Butterfly’.
Compared to the long straddle the long iron butterfly is considerably cheaper for the buyer meaning the max loss is lower and a much smaller move is needed to get to breakeven, the obvious trade off being that the profit in both directions is now capped.
Compared to the short straddle the short iron butterfly has the benefit of having defined the risk in both directions for the seller (in USD at least). The trade off being of course the premium collected is lower.
Here I’ve plotted the short butterfly as above (in red) and the corresponding short straddle (in blue) for visual comparison.
Iron Condor
An iron condor is very similar to an iron butterfly in that it is a combination of a call spread and a put spread, but this time they do not overlap creating a wider range. You can also think of it as a strangle with wings that define the risk (or reward for buyers).
Opening a Long Iron Condor
The current price will typically be between strikes B and C.
You are selling a put at strike A, buying a put at strike B, buying a call at strike C, and selling a call at strike D
Your risk is limited to the net debit paid to establish the position.
Your position will stop making gains once the price gets down to strike A or up to strike D, so your profit is also limited.
This position is similar to a long strangle, but you have limited your maximum profit in exchange for an overall cheaper position due to collecting some premium by selling the put at strike A and the call at strike D.
You are longing volatility. You want implied volatility to increase once the position is opened as it will increase the value of your position.
You want the price to expire either below A or above D.
Opening a Short Iron Condor
The current price will typically be between strikes B and C.
You are buying a put at strike A, selling a put at strike B, selling a call at strike C, and buying a call at strike D
Again your risk and maximum profit are defined.
This position is similar to a short strangle, but you have limited your risk by purchasing the options at strikes A and D.
You are shorting volatility. You want implied volatility to decrease once the position is opened as this will decrease the value of the position you have sold. A sideways ranging market would be ideal for you.
Ideally you want the price to expire between strikes B and C.
Bitcoin Iron Condor Example Using the spreadsheet I have constructed both a long and short iron condor. The long iron condor consists of the following legs: -1 put with a strike price of 2500 and a price of 0.05BTC +1 put with a strike price of 3000 and a price of 0.1BTC +1 call with a strike price of 3500 and a price of 0.1BTC -1 call with a strike price of 4000 and a price of 0.05BTC
The short iron condor consists of the following legs: +1 put with a strike price of 2500 and a price of 0.05BTC -1 put with a strike price of 3000 and a price of 0.1BTC -1 call with a strike price of 3500 and a price of 0.1BTC +1 call with a strike price of 4000 and a price of 0.05BTC
The middle two options in bold are a strangle, and the other two options are called the wings. These are the legs that turn it into an iron condor, defining the risk for sellers and profit for buyers.
This example will be left in the downloadable version of the sheet under the name ‘Iron Condor’.
Compared to the long strangle the long iron condor is considerably cheaper for the buyer meaning the max loss is lower and a much smaller move is needed to get to breakeven, the obvious trade off being that the profit in both directions is now capped.
Compared to the short strangle the short iron condor has the benefit of having defined the risk in both directions for the seller (in USD at least). The trade off being of course the premium collected is lower.
Constructing Butterflies and Condors Using Different Options
In the put spread section earlier we touched on how the USD P/L of a short call spread looks identical to a long put spread, and a long call spread looks identical to a short put spread. As a corollary to this it is possible to construct both butterflies and condors using solely calls, or solely puts.
I won’t go through all the permutations or it will result in unnecessary repetition, but as one example I have constructed here in the spreadsheet an example of a regular short iron condor (in blue) and a condor using only puts (in red).
As you can see in USD terms this has no effect on the P/L (the slight difference only there due to the prices I’ve chosen so you can see both lines), however it does change the shape of the BTC chart. This kind of example can sometimes be very useful when making sure your position’s payoff aligns with what you want in terms of BTC.
Next Up: Option Pricing and Implied Volatility There are still a few other multi leg positions that skew the P/L in different directions and have their own pros and cons, essentially moving potential profit from one area of the chart to another. We’ll come back to those eventually but it’s about time we starting diving into options pricing and implied volatility, which we will do in the next article.
Before we move onto the price you manage to get for each leg of a position, everything on these profit and loss charts that we’ve been looking at so far is a trade off. If you make one part of the chart more profitable then you must sacrifice profit somewhere else, if you are willing to have higher risk in one direction, you can make a larger profit in the other etc.
I would strongly advise having a play around in the sheet by adding different combinations of options and even adding in futures longs and shorts to see what effect these have. It’s a great way to learn and will help you be able to visualise things without the need to keep referencing back to articles or websites for each position while you’re trading. This will allow you to choose the right position for your outlook on the market more easily.
If you have any questions at all feel free to comment on here, hit me up on twitter @cryptarbitrage or in the Deribit telegram chat here: https://t.me/deribit
In part 1 we covered straddles and strangles, both of which had either undefined risk when selling or undefined reward when buying. We’ll now take a look at vertical spreads (call and put spreads), then bring these together to create iron butterflies and iron condors in part 3. Parts 2 and 3 together will show how you can use option combinations to define your risk and/or reward.
If you haven’t already feel free to download a copy of the position builder spreadsheet here: [Position Builder Google Sheet] (Go to File > Make a copy)
Call Spreads Both call and put spreads are an easy way to take a directional trade with very well defined risk and reward. A call spread consists of 2 calls, one short and one long, each at a different strike price.
Opening a Long Call Spread (aka Bull Call Spread)
You are buying a call at strike price A, and selling a call at strike price B.
Your risk is limited to the net debit paid to establish the position.
Your position will stop making money once the price gets up to strike B, so your profit is also limited.
As the total amount paid will be less than if you had only purchased the call at strike A, your breakeven point is a little closer and you need a smaller move to be in profit.
You want the price to be at or above strike B at expiry.
Opening a Short Call Spread (aka Bear Call Spread)
You are selling a call at strike price A, and buying a call at strike price B.
Your risk is limited to the difference between the two strikes minus the net credit you received for the position.
Your maximum profit is the net credit received for the position.
You won’t receive as much as if you had only sold the call at strike A, but you have limited your risk substantially.
Ideally you want both options to expire worthless i.e. the price to be below strike A at expiry.
Bitcoin Call Spread Example Using the spreadsheet provided I have constructed here an example of both a long call spread and a short call spread.
The long call spread contains the following options: +1 call with a strike price of 3500 and a price of 0.1BTC -1 call with a strike price of 4000 and a price of 0.05BTC
The short call spread contains the following options: -1 call with a strike price of 3500 and a price of 0.1BTC +1 call with a strike price of 4000 and a price of 0.05BTC
The long call spread here is in blue, and the short call spread is in red.
As you can see both the risk and reward are very well defined for either longing or shorting a call spread. This is particularly true when measured in USD, but we’ll cover the asymmetry of the bitcoin profit/loss properly in a future article.
This example will be left in the downloadable version of the sheet under the name ‘Call Spread’.
Put Spreads
A put spread consists of 2 puts, one short and one long, each at a different strike price.
You will notice here a similarity with call spreads. In particular that a short call spread looks identical to a long put spread, and a long call spread looks identical to a short put spread. And indeed in USD P/L terms they are basically the same thing just using different options, however they do differ when measuring the profit/loss in BTC. As mentioned though we’ll cover this difference including how to adjust for it properly in future.
Opening a Long Put Spread (aka Bear Put Spread)
You are buying a put at strike price B, and selling a put at strike price A.
Your risk is limited to the net debit paid to establish the position.
Your position will stop making money once the price gets down to strike A, so your profit is also limited.
As the total amount paid will be less than if you had only purchased the put at strike B, your breakeven point is a little closer and you need a smaller move to be in profit.
You want the price to be at or below strike A at expiry.
Opening a Short Put Spread (aka Bull Put Spread)
You are selling a put at strike price B, and buying a put at strike price A.
Your risk is limited to the difference between the two strikes minus the net credit you received for the position.
Your maximum profit is the net credit received for the position.
You won’t receive as much as if you had only sold the put at strike B, but you have limited your risk substantially.
Ideally you want both options to expire worthless i.e. the price to be above strike B at expiry.
Bitcoin Put Spread Example Using the spreadsheet provided I have constructed here an example of both a long put spread and a short put spread.
The long put spread contains the following options: +1 put with a strike price of 3500 and a price of 0.1BTC -1 put with a strike price of 3000 and a price of 0.05BTC
The short put spread contains the following options: -1 put with a strike price of 3500 and a price of 0.1BTC +1 put with a strike price of 3000 and a price of 0.05BTC
The long put spread here is in blue, and the short put spread is in red.
As you can see both the risk and reward are very well defined for either longing or shorting a put spread. This is particularly true when measured in USD, but this time you’ll notice the Bitcoin P/L for buyer and seller diverging instead of converging like it did with the calls. Again we’ll cover the reason for this in future.
This example will be left in the downloadable version of the sheet under the name ‘Put Spread’.
On to part 3 next where we pull the positions we’ve looked at so far together to construct iron butterflies and iron condors.
If you have any questions at all feel free to comment on here, hit me up on twitter @cryptarbitrage or in the Deribit telegram chat here: https://t.me/deribit
Multi-leg option positions allow you to build some quite unusual looking but very useful positions. You can take advantage of sideways ranging markets, trade volatility without having to choose a direction and define your risk on what would otherwise be an undefined risk position among other things.
In the previous article we covered single leg positions i.e. just a call at one strike price or just a put at one strike price. Now we’ll move on to defining some multi-leg positions with different combinations of options in them, how to construct them and what they look like in terms of profit and loss (P/L).
Before we jump into the straddles and strangles I’ve created a google sheet for building multi-leg options positions that also includes regular longs and shorts. This spreadsheet allows you to enter position combinations and then plots the profit and loss of those combined positions onto charts allowing you to visualise them immediately. It plots this in both Bitcoin and USD.
You can download a free copy here: Position Builder Google Sheet (In Google sheets go to File > Make a copy) Any examples we work through in this article I will leave in the sheet so you have them ready to go and can play around with them.
Straddle Option Positions
A straddle position consists of a call and a put at the same strike price and expiry date. A long straddle is buying both the call and the put, and a short straddle is selling both the call and the put. A straddle is one of the simplest ways to take a non directional trade using options.
This is the basic structure of a straddle and how it looks on a profit/loss chart:
Opening a Long Straddle
The current price will typically be at or near the strike price chosen.
You are buying a call and a put at the same strike price and same expiry date.
As you’re buying two options you’re paying more premium than you would if you were picking a direction.
This moves your breakeven points further away from the strike price meaning you need a larger move, but of course now you have two breakeven points as you will benefit from a large move in either direction.
The position is fixed risk, so your maximum loss is the premium you have already paid to open the position.
You are longing volatility. You want implied volatility to increase once the position is opened as it will increase the value of your options. You want the price to move, the more the better, and it doesn’t matter which direction.
Opening a Short Straddle
The current price will typically be at or near the strike price chosen.
You are selling a call and a put at the same strike price and same expiry date.
As with a long straddle the breakeven points are moved further away from the strike price, but as you are selling this works in your favour.
The trade off here is that your risk is not defined in either direction, so your maximum loss is potentially unlimited. For this reason you should avoid shorting straddles until you are more comfortable with options (or you can define the risk by turning it into a butterfly position which we’ll cover in part 2)
You are shorting volatility. You want implied volatility to decrease once the position is opened as this will decrease the value of the options you have sold. A sideways ranging market would be ideal for you.
Bitcoin Straddle Example Using the spreadsheet provided I have constructed here an example of a long straddle at a strike price of $3500, and also assuming a current BTC price of $3500. For this example I’ve assumed both the put and the call cost 0.1BTC each. So this position is: +1 call with a strike price of 3500 +1 put with a strike price of 3500
You will notice the USD profit/loss on the bottom looks exactly the same as the basic structure picture for straddles given earlier but the BTC chart looks quite skewed. This is due to the collateral and profit for the option also being paid in BTC. We’ll cover this in more detail in a separate article about the asymmetry of bitcoin profit/loss.
Now let’s add on to the same chart the sellers P/L, i.e. a short straddle with the same parameters: -1 call with a strike price of 3500 -1 put with a strike price of 3500
The long straddle here is still in blue, with the short straddle added in red.
As a seller’s P/L is just the buyer’s P/L multiplied by minus 1, you can think of this visually as flipping the P/L around the x axis. And so as you can see the breakeven points (where the lines cross the x axis) are the same for both buyer and seller.
The above example will be left in the downloadable version of the sheet under the name ‘Straddle’. Feel free to download a copy for yourself and have a play around with the parameters.
Comparison Let’s take a quick look at how a straddle compares to a single leg. The following is the same long straddle as above compared with just the call leg, all strikes at 3500.
With the single call (in red) you have chosen a direction so you need the BTC price to increase to profit. With the long straddle (in blue) you can now benefit from a move in either direction but the trade off is the extra premium you’ve paid for the put has dragged the whole P/L line down the chart by the amount of that extra premium, meaning you need a larger move to get to breakeven.
Any increase in the total premium paid will move the P/L line down for option buyers and up for option sellers. We will go into much more detail about this and about option pricing in general in a separate article.
As straddles are normally created with at the money options the premiums can be expensive. A cheaper way to put on a similar position is to move the strikes for the call and the put out of the money. This instead creates a strangle.
Strangle Option Positions A strangle is very similar to a straddle in that it is non directional and consists of one call and one put, but the call and put are at different strike prices, generally both out of the money. This has the effect of lowering the premium (good for buyers, bad for sellers) and widening the range (good for sellers, bad for buyers).
Opening a Long Strangle
The current price will typically be between strike A and B.
You are buying a put at strike A, and buying a call at strike B
As you’re buying two options you’re paying more premium than you would if you were picking a direction, but as both options are OTM this will be cheaper than a straddle.
As both your options are OTM you ideally want the price to move significantly but it does not matter which direction.
The position is fixed risk, so your maximum loss is the premium you have already paid to open the position.
You are longing volatility. You want implied volatility to increase once the position is opened as it will increase the value of your options. You want the price to move, and move a lot, but it doesn’t matter which direction.
Opening a Short Straddle
The current price will typically be between strike A and B.
You are selling a put at strike A, and selling a call at strike B.
The range you now profit from is wider than with a straddle, however you will also receive less premium.
Your risk is still not defined in either direction, so although the range is wider your maximum loss is still potentially unlimited. For this reason you should avoid shorting strangles until you are more comfortable with options (or you can define the risk by turning it into a condor position which we’ll cover in part 2)
You are shorting volatility. You want implied volatility to decrease once the position is opened as this will decrease the value of the options you have sold. A sideways ranging market would be ideal, but you do have a little wiggle room depending on which strikes you choose.
If the price expires between A and B you get to keep the whole premium you received.
Bitcoin Strangle Example Using the spreadsheet provided I have constructed here an example of both a long strangle and a short strangle . Again for ease I’ve assumed both options are priced at 0.1BTC but you can adjust the prices and strikes in the sheet to suit your needs and current conditions.
The long strangle contains the following options: +1 put with a strike price of 3000 +1 call with a strike price of 4000
And of course the short strangle contains the following options: -1 put with a strike price of 3000 -1 call with a strike price of 4000
This example will be left in the downloadable version of the sheet under the name ‘Strangle’. I would encourage you to have a play around with the examples as it’s a great way to learn. Change the prices, add other legs or just enter a totally different position in the second section to see how it compares to the first.
In part 2 we’ll move on to positions that use additional legs to define risk (for sellers) and define reward in exchange for cheaper positions (for buyers). This includes call spreads, put spreads, butterflies and condors.
If you have any questions at all feel free to comment on here, hit me up on twitter @cryptarbitrage or in the Deribit telegram chat here: https://t.me/deribit
This will be the first in a series of articles aimed at people new to options, and in particular the Bitcoin options on Deribit. If you already trade cryptocurrencies you are probably familiar with both spot markets and futures markets. Options however are a largely unknown product to many traders, particularly those whose first exposure to trading was cryptocurrencies. Even options on Bitcoin, by far the best known and widely traded cryptocurrency, only exist in a small number of places.
Options have a steeper learning curve than simple buying and selling which along with availability is the main reason they are underutilised. However, once you get over the initial hurdle of learning the basics they are an extremely useful instrument as you can build positions that simply aren’t possible with futures/spot. They can be used alongside futures/spot to complement existing strategies, or they can be traded in isolation.
This article won’t be going into strategy, for now we’ll just give an understanding of what call and put options are and how they work in terms of profit and loss.
First let’s get some definitions out of the way.
What Is An Options Contract? Every option has a buyer and a seller. The buyer is buying from the seller the option to trade the underlying asset at the strike price on the expiry date.
Each option consists of the following: Underlying asset — The asset being traded, in this case Bitcoin. (For the purpose of pricing calculations on Deribit the underlying asset is either the Deribit BTC index or the closest BTC future). OptionType — Either a call (the right to buy at the strike price on the expiry date) or a put (the right to sell at the strike price on the expiry date). StrikePrice — The price at which the buyer has the option to buy (for calls) or sell (for puts) Bitcoin. For a call option to have value at expiry the BTC price must be higher than the strike price. For a put option to have value at expiry the BTC price must be lower than the strike price. ExpiryDate — The date at which the option is automatically exercised. After this date the option is no longer valid and can no longer be exercised. OptionPrice(aka Premium) — The price the buyer pays to the seller for the option to buy (call) or sell (put) Bitcoin at the strike price on the expiry date.
The options on Deribit are European style and cash settled.
European style — Options cannot be exercised before the expiration date. However it’s worth noting that they can still be traded prior to expiry (i.e. you do not have to hold it until expiry). Exercising an option means putting the right specified in the contract into effect i.e. buying at the strike price of a call or selling at the strike price of a put. Cash settled — When the option is exercised any value the option has is paid from the seller to the buyer in cash (in this case Bitcoin). The Deribit options are exercised automatically on expiration so you don’t actually need to worry about how or when to do this.
Let’s look at how buying a call or buying a put compares to longing or shorting futures.
As you can see by the green lines, when buying a call or put you limit your losses to a fixed amount (unlike longing/shorting futures). In exchange for this protection you pay a premium to the option seller shifting the whole profit/loss line down the chart by the amount of the premium paid.
It’s also possible to combine more than one option to create a wide variety of different payoff curves. We will save these multi-leg positions for the next article though. For now let’s move on to the profit and loss of Bitcoin options and how to calculate it.
Bitcoin Call Option Visualisation
A BTC call option is the right but not obligation to buy 1 BTC on the expiry date at the strike price. If you are the buyer of a call option you want the BTC price to go up, as the more it goes up the more your call option is now worth.
Let’s look at an example of a call option with a premium of 0.1BTC and a strike price of $4000. The following chart shows what the profit/loss of that option would look like if you held it to expiry:
The x axis is the price of Bitcoin at expiry, the y axis is the corresponding profit of the position in BTC. Blue is the buyer’s profit/loss, red is the seller’s profit/loss. We’ll go through some examples of how to actually calculate this later.
Bitcoin Put Option Visualisation
A BTC put option is the right but not obligation to sell 1 BTC on the expiry date at the strike price. If you are the buyer of a put option you want the BTC price to go down, as the more it goes down the more your put option is now worth.
Let’s look at an example of a put option with a premium of 0.1BTC and a strike price of $4000. The following chart shows what the profit/loss of that option would look like if you held it to expiry:
The x axis is the price of Bitcoin at expiry, the y axis is the corresponding profit of the position in BTC. Blue is the buyer’s profit/loss, red is the seller’s profit/loss.
How to Calculate Profit/Loss of Bitcoin Options
If an option expires out of the money then this option expires worthless and no further transfer will occur between buyer and seller. The buyer’s only loss is the premium they paid for the option, and the seller gets to keep the premium they collected.
A call option is out of the money (OTM) when BTC Price < Strike Price A put option is out of the money (OTM) when BTC Price > Strike Price
However if an option expires in the money (ITM), this option’s value is determined by the difference between the BTC price at expiration and the strike price according to the following formulas:
Call Example
You buy a call with the following attributes: Strike Price: $4000 Option price: 0.1 BTC At the time of expiry the price of Bitcoin is $5000.
Your net profit can be calculated as: =((BTC Price — Strike Price)/BTC Price) — Option Price =((5000–4000)/5000) — 0.1 =0.2–0.1 =0.1
So when you first purchased the call option you paid 0.1 BTC to the seller. The option was worth 0.2 BTC at expiry so you then receive this amount into your account. Leading to your net profit of 0.2–0.1 = 0.1 BTC.
Put Example
You buy a put with the following attributes: Strike Price: $4000 Option price: 0.1 BTC At the time of expiry the price of Bitcoin is $3000.
Your net profit can be calculated as: =((Strike Price — BTC Price)/BTC Price) — Option Price =((4000–3000)/3000) — 0.1 =0.3333–0.1 =0.2333
So when you first purchased the put option you paid 0.1 BTC to the seller. The option was worth 0.3333 BTC at expiry so you then receive this into your account. Leading to your net profit of 0.3333–0.1 = 0.2333 BTC.
I’ve created a free Google sheet you can use to test some more examples of options profit and loss for yourself. Feel free to save a copy for to your own drive here: Bitcoin Option Profit/Loss Google Sheet
Maximum Profit and Loss As you may have guessed from the profit and loss formulas, buyers of options always have a maximum loss of the premium they paid for the option. As your risk is very well defined when buying, it makes this a much safer side of the trade to be on, particularly if you’re new to options. (Though selling does have other advantages that we’ll go into in another article)
Below is the maximum profit and loss for buying and selling either puts or calls. One interesting thing worth mentioning about the Deribit options in particular is the collateral used for these options is BTC. This means your collateral gains in value as the BTC price goes up, and loses value as the BTC price goes down. This leads to a difference in how the BTC profit/loss charts look compared to how a USD profit/loss chart would look for traditional stock options.
Breakeven Points Contrary to what is quite a common assumption with people new to options, the breakeven point is not the strike price. This would of course only be true if the option had cost nothing at all. Thankfully the calculation is quite simple, and is the same for both buyer and seller.
Breakeven for a call = Strike Price / (1 — (Option Price / 1))
Breakeven for a put = Strike Price / (1 + (Option Price / 1))
As you can see you need to account for how much you pay for the option to determine the price at which you breakeven. As a buyer the more you pay for an option the further away from the strike price your breakeven price will be, and therefore the more price needs to move for your position to make money.
Some Reasons to Trade Options 1. When buying either a call or put option your risk is fixed to the price you paid for the option, no matter how much the price moves against you. With futures/spot your risk is not fixed, and even with a stop loss in place you can’t guarantee these will execute at the price you intend. Slippage is often an issue, particularly on violent moves. This fixed risk feature of buying options of course has the benefit that you cannot be stopped out or liquidated. It is important to note though that this is NOT true when selling options.
2. Options are much more versatile in terms of what kind of position you can build. With futures/spot you either buy or sell and the price either goes in the direction you need it to or it doesn’t. With options you can still profit from those same movements, but you can also profit from sideways markets by for example selling straddles or strangles (we’ll go into more detail about this in future articles).
3. You can trade volatility using options without having to pick the direction correctly. If IV is high and you think it’s going to fall you can short both puts and calls, if IV is low and you think it is going to increase soon you can buy both a call and a put to benefit from an increase in volatility no matter which way it goes.
4. Option sellers benefit from the markets tendency to overestimate future volatility. This means implied volatility (on average) is slightly higher than realised volatility. Sellers get to capture this difference in the extra premium they charge. We’ll go into much more detail about this in future articles as well.
It’s not all good news though. When buying options you have a time limit for your trade to work out. If you buy a call for example and by the expiry date the price still hasn’t got up to your breakeven point, that’s it the trade is over. If a future expires at the same price you bought it for your position will be break even (minus fees), however any options bought would have lost any extrinsic value they initially had. When selling options your profit is limited to the premium you collected, you do not receive anything extra for being very right like you would with a futures trade.
Despite this options can be extremely useful instruments to trade in a variety of circumstances.
I wanted to keep this first article as simple as possible so we’ll save subjects like options pricing, volatility and multi leg positions for another day.
If you have any questions at all feel free to comment on here, hit me up on twitter @cryptarbitrage or in the Deribit telegram chat here: https://t.me/deribit
