February 11, 2019

Introduction to Bitcoin Options Profit/Loss

By @cryptarbitrage

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).
Option Type — 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).
Strike Price — 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.
Expiry Date — The date at which the option is automatically exercised. After this date the option is no longer valid and can no longer be exercised.
Option Price (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

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

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:

September 05, 2018

Stop Market Orders, Estimated Liquidation Price and more new feature

Following the introduction of the Deribit perpetual mid August 2018, we have attracted a lot of new customers from other exchanges. Some of these new customers asked for features that we were planning to add to the platform. Over the last two weeks we have prioritised a number of these requests to make our new customers feel even more at home.

Feature 1 – Stop-Market order

The first and most wanted new feature on the Deribit platform are Stop-Market orders. Deribit customers can use this order type to trigger a stop loss market order when a certain price is reached. This is a useful addition to Deribit’s Stop-Limit orders. Stop-Limit orders trigger a limit order as soon as a certain price is reached. This limit order may not be filled entirely, so user may prefer a market order instead. Both order types allow customers to choose whether the trigger price should be based on the mark price or the index. Note that the index will move faster than the mark price when prices are volatile.

Feature 2 – Estimated Liquidation price

Up until now the interface only showed the liquidation price on the positions table. Unfortunately, this is only there after a trade was executed, which confused some users. Deribit now displays the ‘Estimated Liquidation Price’ before a trade is executed. This way users can know at forehand what risks they are taking on.

The screenshot below shows the ‘Estimated Liquidation Price’ on the pre order dialog.

Feature 3 – Close Position Button and Limit close

Another new feature is the close position button. Users can access the new feature in the ‘Close’ column of the ‘Positions’ tab. Traders have the option to decide if they want to close their position at a specified limit price (gold button) or immediately at market price (red button).

Feature 4 – ROI / Return on Investment

Lastly, Deribit introduces the Return on Investment display on its trading platform which shows the ROI percentage value of open positions. The ROI percentage is calculated with the following formula: ROI = (100% * PnL)/(Initial Margin). The ROI adjusts in real time. This allows customers to easily determine and compare the current state of a trade.

Going forward

For now we are focusing on adding other crypto’s to the platform which we expect to finish within a few weeks.

We are also working on more improvements to the interface, as well as smaller features. If there are any other requests don’t hesitate to ask engage us on Telegram or Twitter. Either you will speak directly to management or we will hear about it.

August 28, 2018

Deribit Perpetual comes out of Beta with 100x Leverage

Deribit PerpetualOn the 14th of August we launched the beta version of our substantially improved version of the prominent Perpetual Swap; the Deribit Perpetual.

In the two weeks since the Perpetual beta was launched, it quickly became the dominant product on the Deribit platform. Thanks to the Perpetual, total volume on the exchange went up by more than 50%. Market makers have also shown an increasing level of support. As a result the Deribit Perpetual trading book has developed into one of the most liquid books in the market with significant size on the bid and offer side.

The Deribit Perpetual provides traders with:

  • Low Fees: Charging just 0.075% on market orders, paying 0.025% on limit orders
  • Extremely fast trading: Executing transactions in a few milliseconds
  • Overload Protection: A flexible system able to deal with any volume
  • Price Stability: Continuous payments and other measures keep the Perpetual’s price close to the Bitcoin price
  • Fair Liquidation: The closing out of a leveraged trade does not hurt more than it has to.

As from today the Perpetual also provides traders with 100x leverage.

100x Leverage

We are now comfortable to increase the maximum leverage to 100x. This means that for every USD in the account (minus the trading fees) you can take USD 100 of exposure.

Liquidation Fees Increased by 0.05%

Deribit tries to make liquidations of leveraged positions as painless as possible. We do this by using step-wise, incremental liquidations in combination with crediting any funds left over after a (partial) liquidation back to the traders. In most cases this brings a position back in line or at least returns some funds to the customer. Our competitors will liquidate the position in one go and not return any left-over funds.

Deribit does charge an additional ‘liquidation fee’ to compensate its reserve fund in the case of a liquidation transaction. As of today this liquidation fee will be increased from 0.10% to 0.15%. We expect this fee increase to cover any additional risks and will allow our reserve fund to continue to grow at a modest pace.

Cross-Margin vs Isolated Margin

Deribit works with “cross-margin” and this means the funds in the account serve to back all outstanding trades. If you want to use isolated margin and apply a certain leverage to a single trade you can use a sub account to isolate the required margin for the trade.

August 14, 2018

Introducing The Deribit Perpetual

Deribit perpetual betaToday Deribit launched a blazing fast version of the extremely popular Perpetual Swap. We are launching this product in Beta, but it is fully tradable. We expect to come out of Beta and add some additional features soon.

The Perpetual is responsible for between 40 and 50 percent of all global trading in Bitcoin. It allows traders to take positions without any bitcoin actually changing any hands. It features low fees and traders can take very high levels of leverage. This means traders can take very large positions with only a small capital outlay.

A Perpetual is a complex product for an exchange to implement. Up till now the only exchange offering it was BitMEX. Thanks to the Perpetual, this exchange is currently the dominant one globally.

Deribit now offers a version that has a number of large advantages over the conventional product.

Blazing fast execution

Deribit already had one of the most advanced platforms in the market. Over the last half year Deribit’s developers worked flat out to make sure that our order execution speed will remain blazing fast even under extremely high volumes. This means Deribit can handle thousands of order requests per second. Even then, order delays wil be at most a couple of milliseconds per order.

The Deribit Perpetual executes orders 20x to 40x faster than the conventional Perpetual on average, and in fast moving markets the difference can be significantly larger. Fast execution can have a significant positive effect on profits, especially in the case of large price moves. It also provides our customers with comfort that there are no preferred parties that are allowed to front run the market.

Continuous pricing

In order to keep its price close to the Bitcoin price, a Perpetual uses so called ‘funding payments’ that occur between the buyers and sellers of the contract. The conventional Perpetual transfers the funding payment every 8 hours and this can cause bumps in the contract price around the moment of payment. The Deribit Perpetual makes tiny payments on a microsecond basis. This completely avoids price disturbances and will serve to keep the Perpetual price very close to the Bitcoin level.

Fair Liquidations

Perpetuals and related products like futures enable traders to take large ‘leveraged’ positions on the basis of only a very limited amount of capital. The capital backing a leveraged trade is called ‘margin’. At the moment Deribit offers 50x leverage so with 1 Bitcoin of margin you can take a 50 Bitcoin position. If the price moves against a leveraged position, eventually the exchange has to close out (liquidate) the position in the market to ensure there is always enough capital to cover the potential losses of the trade.

A number of high profile liquidation related incidents at other exchanges have resulted in large losses for traders. Deribit has designed a fairer liquidation mechanism that executes liquidations on an incremental basis while continuously trying to bring the position back into compliance. If a position is eventually closed out Deribit customers retain any capital that is left over instead of automatically losing their entire margin.

In most cases Deribit is able to stop the entire position from being liquidated or return some of the margin to the customer. Deribit has never had to ‘socialise’ liquidation losses by recouping them from other traders.

Another important advantage of Deribit over other exchanges is that they allow unrealized profits to be used as capital. This means that if a position is profitable, the unrealised profits can be used immediately as capital to open new positions, without waiting for a settlement.

Perpetual Improvement!

The Deribit Perpetual will be in beta initially. We expect it to come out of beta soon with some interesting new features. Other crypto currencies like ETH and BCH will follow pretty soon.

If you have any questions don’t hesitate to contact us on or join our conversation on twitter or Telegram

For a more technical explanation about the Deribit Perpetual, see our documentation

About Deribit

Deribit was founded by John Jansen, an early crypto investor with a background in options trading on the Amsterdam Options Exchange. In 2014, after a period trading cryptos on different exchanges, he developed a vision of an exchange where it would be possible to trade Futures, Options and other ‘derivative’ products in a secure – high performance – environment. John then proceeded to team up with a group of technical experts to turn this vision into a reality.

After two years of intensive development Deribit went live on June of 2016. Currently Deribit is a top 3 crypto futures exchange and the number one crypto options exchanges globally. We run our business from our office in Amsterdam (The Netherlands) and our development team is located in Poland.

About Perpetuals

A Perpetual on (for example) Bitcoin is a product that aims to closely track the Bitcoin price. It is based on the underlying price of Bitcoin without any real Bitcoins being involved. This makes the product a so called ‘derivative’ product. This means that traders enter into ‘contracts’ with the exchange instead of doing an actual Bitcoin transaction.

In these contracts Perpetual traders pay or receive the difference between the price when they entered into the position and the price when they unwind it. So if the price level of the Perpetual was USD 7500 when someone bought a position and USD 8000 when they sold it the payout is USD 500 worth of Bitcoin for every Bitcoin of exposure.

Traders can buy contracts – called long positions – that benefit from a rise in the price. Conversely, traders can sell contracts – called short positions – that benefit from a price decline. There are always as many long as short positions outstanding, so the exchange has no position itself.

The product is makes it very easy to quickly trade in and out of both long and short positions and features low trading fees. Perpetuals also allow for high leverage. This means that for every single Dollar of collateral in the account a trader can take up to 100 Dollar of Bitcoin exposure.

The product is related to the futures contract but unlike a futures contract a Perpetual does not have a finite term and that is where its name comes from. The price of the Perpetual is kept close to the Bitcoin price by funding payments between the longs and the shorts.

If the Perpetual trades higher than the Index, traders that are long the perpetual need to make funding payments to the shorts. This will make the product less attractive to longs and more attractive to shorts and this will serve to push the Perpetual price back down to the level of the Index. If the Perpetual trades lower than the index the shorts will have to pay the longs.

August 10, 2018

Deribit Introduces Sub Accounts

After our big upgrade last Thursday we promised you a lot of new features and products in the coming period. Today we would like to present the first new feature: Sub Accounts.

Sub accounts allow for the separation of a portion of a trading account, both administratively and from a margining perspective. Every account can generate a maximum of 4 sub accounts that allow for the implementation of managed accounts and dedicated margin for certain trades or strategies.

Managed Accounts Possible

The sub accounts allow for the creation of separate login data but the sub account login does not give any right to withdraw funds. This means a manager or adviser could get access to a sub account and execute trades on behalf of the client without being able to withdraw funds or access the main account.

Isolated Margining of Trades and Strategies

Normally all positions in a Deribit account are cross-margined, this means that there is one pool of available margin for all positions and one sufficiently large liquidation could have a big impact. Sub accounts are individually margined so they can be used to allocate a certain amount of margin to a given trade or strategy.

Say for example that a trader wants to put on a risky trade or a new bot-based strategy; both of them should not impact the total amount of margin if they go wrong. These risky trades or strategies could be assigned to separate sub-accounts protecting the margin in the rest of the account.

Users can instantly transfer funds between the main account and sub accounts. This means margin can be increased and decreased at a moment’s notice.

Here is a video from our co-founder Marius made in order to explain this new functionality:

Stay tuned for even more upcoming products and features that the market has been asking for.

August 09, 2018

Deribit Finishes Massive Infrastructure Upgrade

For more than half a year our development team has been working to drastically change the architecture of our trading platform. The goal was create a platform that is really built to scale, potentially to millions of users. This project was the reason our customers have been waiting for the introduction of new trading products for some time. Yesterday we have executed a massive upgrade, completing our work on scalability. After this upgrade we will start adding new products and features at high speed.
Like with any large upgrade it is possible that the system encounters some problems over the next few days. If this happens we want you to know that we will try our best to ensure any degraded service will be kept to a minimum. If you encounter any issues, please don’t hesitate to contact support.

Background of the upgrade

Deribit used to have quite a traditional architecture where all activities related to a trading book were dealt with on the same server. As we have seen with a number of other exchanges, not properly taking scalability into account can lead to a lot of performance problems down the line. As Deribit intends to drastically increase its scale and does not want to make any concession to its blazing fast execution we needed to solve this problem first.
After this upgrade our exchange runs on a large cluster of dedicated servers, where the matching engines are running on servers isolated from the rest of the internet. The matching engine servers do all the matching and order handling for the trading books. They continuously send out order state updates to the webservers to which all users connect. The webservers do all the work needed to inform the customers about the status of their orders.

The new architecture is extremely flexible. For each matching engine server we can quickly launch an almost unlimited amount of webservers to which traders can connect. At the same time the webservers are kept completely in the loop of the state of the matching engine. This happens in such a way that if a problem would appear on the matching engine server, a web server can easily be converted to become a matching engine server.

This means that we do not even need specific backup servers anymore, as all our webservers are effectively stand-by replacements. Thanks to this new setup, we can now handle a virtually unlimited amount of messages and requests. The matching engine is now also extremely efficient and only has to deal with trade matching, and adding or removing orders from the order books.

Now our platform is ready to deal with any volume, stay tuned because over the next few days we intend to release a number of products and features that the market has been loudly asking for.

July 13, 2018

The secret to making crypto backed USD loans work

There is a lot of hype surrounding long term crypto holders that borrow cash using their crypto holdings as collateral in order to access liquidity. This allows them to remain invested and avoid potential capital gains tax claims. The ‘çrypto backed lending market’ that facilitates these loans is attracting many new entrants and volumes are rising. One big risk causes a lot of potential participants to shy away from this market; in case of a large price drop more collateral might be required and the resulting margin call can result in serious risks for both lender and borrower. We propose combining crypto backed loans with relatively cheap put options to neutralize the risk of a large price drop. This means the borrower will always be able to pay off the loan and the loan effectively becoming risk free for the lender. The feared and loathed margin call mechanism can be dispensed with all together.

At the end of March 2018, as much as 77.9% of the surveyed crypto investors were very optimistic and expected the crypto market to rise in value over the next three years, according to The Huobi Crypto Investor Index. This positive sentiment also raises a potential challenge for crypto holders – how could they spend some of the money they made without having to pay a lot of tax and losing access to future price appreciation?

Over the past 6 months  a number of crypto backed lending platforms emerged to help out with exactly this problem. These companies give crypto owners the possibility to maintain ownership of their cryptocurrency assets, while using their coins and tokens as collateral for (usually) a US Dollar denominated loan.

How do crypto backed loans work

The model of these platforms is very simple – the borrower transfers a portion of his or her crypto holdings to the platform, where it is stored in a cold wallet as collateral for a cash loan. The interest rate is usually between 10 and 20% and the term of the loans varies between 1 months and 5 years.

To protect the lenders, the value of the crypto collateral exceeds that of the loan. In most cases the so called loan to value ratio is between 40 and 60%, but it can be as low as 20% and as high as 80%. A loan to value ratio of 40% means that the loan amount is only 40% of the value of the collateral and the value of the collateral can drop by 60% before repayment of the loan is at risk. Putting it into numbers: if a borrower wants a loan of $50,000, he or she would have to provide crypto asset collateral worth $125,000.

If the borrower stops making payments, the lending platform can sell the collateral, and this should cover the loan. Additionally, if the value of collateral decreases below a certain level, say $75,000 for our $50,000 loan, there will be a margin call after which the borrower has 48 to 72 hours to bring the loan to value ratio back in line by either depositing additional crypto collateral or by making an additional cash principal payment. If the borrower does not satisfy the margin call the lender will pre-emptively sell the collateral to cover the loan. This type of selling is often done in falling markets and can realize large losses for the borrower. It also exposes the lender to large losses if the value of the collateral drops below the value of the loan during the margin call period and the borrower does not have the desire or the ability to post more collateral.

Nevertheless the crypto backed lending market has been gaining tremendous interest and volumes are rising.

Current crypto backed lending environment

The most mature companies in this space are Nexo and Salt Lending. Salt Lending is the oldest company in the space, it funds the loans by letting accredited investors invest in new loans through a fund structure. The administrative requirements to close a new loan can take quite long to complete. Nexo lends out its own money and applies a lot of automation. This improves the servicing time and a loan can be originated relatively quickly.

Some of the most popular active crypto backed lending platforms are compared in the table below:

Even though total reported volume is still below USD 100 million, crypto backed loans have been gaining popularity and lending platforms report loan demand significantly surpassing supply. From December 2017 till the 23rd of February 2018 Salt Lending has reported loan requests for a total amount of 1.3 billion USD when they halted new applications. They had only managed to close slightly more than $23 million at this point, mainly because of administrative restrictions.

How derivatives could kick start the crypto backed lending market

We believe the crypto backed lending market is still quite inefficient. The risk of having to face a dreaded margin call in the middle of a major downward price move is sure to scare away borrowers. At the same time lenders are not too happy with the risk that the collateral ends up being worth less than the loan amount in case the borrower not making a margin call.

The crypto derivatives markets seem to offer a cheap and safe solution to effectively insure the value of the collateral. This will ensure the borrower can always repay his or her loan, without any margin calls being necessary.

This miracle can be achieved with an instrument called a put option which can act as an insurance policy for the collateral. A put option is the right to sell the crypto asset used as collateral at a pre-determined price, called the ‘strike’ price. This means a put option insures the option buyer against the market price dropping below the strike price; if the price ends up below the strike the buyer of the option would simply exercise its right to sell the asset at the strike level.

In the case of a crypto backed loan puts could be used to insure the collateral value at a price level that ensures its value never drops below the loan amount. The premium that needs to be paid for the options will in most cases be significantly smaller than the interest rate charged on these loans.


Say a lender executes a $50,000 loan with a borrower either directly or through a peer to peer platform. We assume the loan to value ratio is 40.0%, the interest rate clocks in at 14% and we assume an end date of December 28, 2018 for the loan. All prices are from the 13th of July at 14:00 hours CET.

Next the lender buys put options in order to protect the value of the collateral. The Deribit crypto derivatives exchange offers options that mature in December 28, 2018.

In our example, the lender would be at risk when the BTC price would drop more than 60%, i.e. below the $2,500 level.  This means we have to choose the strike of the put we are going to use to be as close to that level as possible and then we need buy enough options to hedge the entire loan: 20 options at a strike of $2,500 brings us to $50,000.

With the put options added to the mix, the value of the collateral can not drop below the loan amount making the loan effectively risk free and leaving the borrower in a much better position. There would normally be a margin call if the value of the collateral drops below a certain value (say $75,000) but thanks to the put options margin calls are not needed anymore.

Note that this also means that the borrower now has the guarantee that there will always be enough funds in the collateral account to repay the loan. This means the borrower now has a much more attractive product; without an intimidating margin call and with a repayment guarantee.

It is clear that the put option makes the product a lot more attractive for the borrower. Since the lender is paying for the option, the interest rate the lender receives could probably go up somewhat. But even assuming the current prevailing interest rate on such a loan the transaction allows for a 7.45% annual excess interest for the lender which is almost risk free.

Maturity and Crypto Limitations

A drawback of the current options market is that the longest dated put options mature on December 28, 2018. This affords a maximum of a half year of protection and limits the maturity of a protected loan. Another concern could be liquidity, which can be relatively low for out of the money put options. Option market liquidity is rising quickly however and decent bids are usually filled by parties arbitraging the options market.

Another limitation is that long dated options are still only available in Bitcoin. Deribit – currently the most liquid crypto options exchange – is planning to offer more crypto’s and longer dated product soon however. Other exchanges are also rumored to start offering options on multiple crypto’s. One remaining risk, and the reason we say ‘almost risk free’ loan, is the risk related to failure of the derivative exchange where the option is bought. You basically want your insurance company to be there when you need it. This makes it certainly advisable to select a stable, established exchange to transact the options on.


Derivatives turn out to be an effective way to make crypto backed loans almost risk free for both lenders and borrowers. Taking away so much risk should also allow loans to be approved more quickly and increase the transaction speed for the borrowers. We believe this will entice more lenders and borrowers into the market and allow the crypto backed lending market to really take off.



July 10, 2018

New Deribit Mobile Interface

We have released a new version of our mobile interface. It has the following major improvements:

  • Reduced loading time by up to 95%
  • Added the ability to trade options
  • Added price charts and order book depth chart

The new Deribit Mobile Interface is available on both the Apple App Store and in Google play Store

Let us know any feedback in our Telegram! We will have an instruction video online soon.

June 29, 2018

Live Deribit Trading Data in Excel

Excel logoTraders often use spreadsheets to model how derivatives will behave. While adding live data can be done by copy/pasting data from our trading application, our traders deserve better. Therefore, we have developed an Excel sheet which uses macros to retrieve live data from our API. Using this sheet as a basis, you can easily access live pricing data for instruments on our platform. You can obtain the Excel sheet here. After you’ve downloaded the sheet, Excel will prompt you to confirm that you wish to enable macros. If you don’t enable the macros, you can still review the sheet, but the data won’t be live.

Using the formulas in Excel

=DERIBIT_INDEX()The Excel macros provides several different functions, which you can use in your formulas. The most useful function is probably DERIBIT_INDEX. This function provides the current value of the Deribit index. This index serves as the underlying of all of our futures, and some of our options. To use it in a sheet, type =DERIBIT_INDEX().

An equally interesting function would be DERIBIT_PRICE, which retrieves the price for a specific instrument. For example =DERIBIT_PRICE(“BTC-29JUN18-6000-C”) would result in 0.0475 (at the time of writing). This is the latest trade price for the call option with strike $6000, expiration date june 2018. Similarly, DERIBIT_MID provides the current order book midpoint. The following price information formulas are available:

  • DERIBIT_PRICE provides the latest trade price
  • DERIBIT_MID provides the current order book midpoint
  • DERIBIT_ASK provides the current best ask price
  • DERIBIT_BID provides the current best bid price
  • DERIBIT_MARK_PRICE provides the current mark price
  • DERIBIT_BID provides the current best bid price
  • DERIBIT_24H_VOLUME provides the current best bid price
  • DERIBIT_IV provides the implied volatility for an option (using the current mark price)
  • DERIBIT_ASK_IV provides the implied volatility for an option (using the current best ask)
  • DERIBIT_BID_IV provides the implied volatility for an option (using the current best bid)
  • DERIBIT_DELIVERY_DATE provides the delivery date.

Accessing historic data

When  DERIBIT_PRICE or DERIBIT_IV is provided with a date in its second parameter, it will provide the price or implied volatility for that date. For example: =DERIBIT_PRICE(“BTC-29JUN18-6000-C”,DATEVALUE(“2018-06-19 06:00:00”)) will result in 0.0850, the latest trade price for the $6000 call option at jun 19th, at 6 am (UTC). 

Generating instrument names

While users can copy and paste instrument names into their Excel sheets, sometimes it is useful to generate instrument names from delivery dates, strikes and option types. To do so, use DERIBIT_OPTION_NAME or DERIBIT_FUTURE_NAME. For example, =DERIBIT_OPTION_NAME(DATEVALUE(“2018-06-19”), 6000, “call”) will produce BTC-19JUN18-6000-C.

Data timeliness

Our Excel macros provide price data with a maximum delay of 15 seconds, although you may need to perform a recalculation using F9 to actually get the latest data. Despite the short delay, we advise users to verify the prices before making a trade, especially on fast moving markets.

Example strategies

When you’ve downloaded the Excel sheet, you’ll find a worksheet with formula examples, and several future and option strategies. Most of these example strategies focus on return on investment, on different settlement prices. Of course, these strategies are just a small sample of the possible alternatives.


June 20, 2018

BTC Implied Volatility at Historical Low – Time to Buy BTC Options?

Deribit hosts the only liquid crypto options exchange globally and this generates a lot of unique data. This data allowed Flood to present to the world history’s first implied volatility graph for Bitcoin. We updated this graph with some recent data.

.This article is a follow up from Flood‘s great article about our options platform. Flood’s article explained the basic features of BTC options and discussed the effect of implied volatility (IV) on option pricing.

First Implied Volatility Analysis for BTC

Deribit hosts the only liquid crypto options exchange globally and this generates a lot of unique data. This data allowed Flood to present history’s first implied volatility graph for Bitcoin. We updated this graph with some recent data below.

48-hour rolling implied volatility of most liquid deribit options vs bitcoin price

The BTC implied volatility is the expected future volatility of the BTC price that is implied by option prices (premiums) on the Deribit exchange. All other things equal; higher option premiums imply higher implied volatility. For the statistically minded: the implied volatility is the expected annual standard deviation of the BTC price in percentage points.

For the graph we selected the most liquid call and put for every maturity date outstanding and calculated the 48 hour average implied volatility based on all trades in those options. It shows that volatility was highly variable up to December 2017 as the market was still relatively illiquid. Then, in December 2017, IV went up together with the BTC price.

In the equity market, rising stock prices lead to lower implied volatility, as optimism reduces the equity market’s expectation of risk and hence price variation. When equity markets go down, implied equity market volatility tends to go up.

The BTC market shows the opposite pattern. When the Bitcoin price exploded in December, implied volatility went up significantly as traders took the possibility of further price leaps into account. This was a great period to sell volatility (write options and collect the premium).

When the market went down implied volatility came down, especially after March when the options market started to perceive a range bound trading pattern  as more likely. Earlier this June, BTC implied volatility reached a historical low. After the BTC drop last week it went up by a few points but IV has since receded again.

BTC Option Strategy

This low IV might make it attractive to buy options. Call options might be especially interesting (if you’re bullish) because Bitcoin’s implied volatility tends to go up when the price of BTC rises. This would result in a more expensive option and might generate a double boost to a call option price if BTC goes up. Short dated options might be especially interesting if you believe the market is likely to jump up and down in the short term even if it might be range bound in the medium term.

Let’s look at a concrete example: Today the 20th of June at about 3pm CET you can buy a strike 6000, 27th of July ’18 Call option on one Bitcoin for about USD 880.

Options chain

With this option you receive any positive difference between BTC price and 6000 on the expiration date, the 27th of July. This means you will make money if BTC is higher than 6880 in 37 days. You can not lose more than USD 880 however and this effectively protects you against BTC dropping below 6000. The current BTC price is 6626 so by sacrificing USD 254 (USD 6880 – USD 6626), or 3.8% of a Bitcoin, you are effectively protected from BTC dropping under the 6000 level.

Profit and loss - 6000 call option june (on 27 july 2018)

Plans for the Deribit BTC Options Platform

We intend to start talking about our options platform and options strategies a lot over the next few months. We will also introduce many new products going forward. We recently introduced long dated December options. We will soon be introducing options (and futures) on different crypto’s like ETH and BCH.

We are also working on a more formal implied volatility index which is calculated in a similar way as the VIX, the implied volatility index of the S&P 500. This will be a great information source on expected BTC movements. It might even be a good reference asset for an implied volatility futures contract, like the extremely popular VIX futures.

Have a look out our cheat sheet to find out more about options trading.

Don’t hesitate to ask questions in our Telegram group if you want to discuss any topic related to options theory and strategy. We are there to help you out.