Deribit is a derivatives exchange for trading cryptocurrency one of the main competitors to BitMEX, this guide is for those who just want a very basic understanding of Deribit’s options exchange.
1. Terminology
Futures: a derivative contract that, when expired, will settle with value at expiration, whether or not the trade is at a loss. There is an obligation to fulfill the contract.
Option: a derivative contract that, when expired, will only pay at expiration when it’s “in the money” or “at the money”. In other words, payment is optional and dependent on if the option is in profit.
European style option: an option that cannot be exercised prior to expiration. This does not mean you are forced to hold until expiry. All options on Deribit are European Vanilla style.
Call: an option to buy the underlying asset at expiration. In simpler terms, buying calls = going long
Put: an option to sell the underlying asset at expiration. In simpler terms, buying puts = going short
Δ|Delta: the amount an option price is expected to move based on a $1 change in bitcoin. Delta total: (Futures Deltas + Options Deltas + Futures Session PL + Cash Balance - Equity). A delta of 0 means balance won’t change if bitcoin’s price changes.
Intrinsic value: the premium between the underlying asset’s price (bitcoin index price) and strike price (price when the option will be in profit).
Time value: the premium found from the difference between the premium and intrinsic value.
Implied volatility: predicted volatility of an option, which can rise because of: increasing interest in buying the option, the underlying asset’s price rising, etc. Implied volatility can drop for the opposite reasons.
2) Intrinsic Value, Time Value, Delta, and Implied Volatility
Intrinsic value and time value are the main forces for option premiums. Intrinsic value is the difference found by being in the money.
Intrinsic value for call options:
If underlying > strike price, then the intrinsic value =
underlying asset value minus the strike price
If the underlying is less than strike price, the intrinsic value is zero.
Intrinsic value for put options:
If strike price > underlying, then the intrinsic value =
strike price minus the underlying asset value
And if the underlying asset value is greater than strike price, the intrinsic value is zero.
Time value has a greater value the more time an option has before expiring; time value experiences time decay, which means it loses value over time due to the option being more predictable.
Time value is calculated the same for calls & puts:
time value = premium - intrinsic value
Δ|Delta for options is bound between 0–1 (call) and -1–0 (put). A delta of 0.33 means that for each $1 that bitcoin moves, the option will increase in price $0.33. The other popular options Greeks are Vega, Gamma, and Theta (to be explained).
Implied volatility (IV) is the estimated volatility of an option, and it factors in not only the underlying asset, bitcoin, but variables of the option as well such as the predicted expiration price. The extremely speculative market of cryptocurrency has high IVs for its derivatives, so it would be well worth looking into. The general rule for IV is that it may have a reversal after overextending. For traditional markets, it is recommended to short high IV and long low IV.
Deribit’s historical volatility chart, you can see where bitcoin died on 2 Aug. 2018
3) Option Types
When shorting calls or puts instead of longing them, the seller gains back the price of the option + its premium.
Maximum gain: option price + premium (full profit is realized upon selling)
Potential loss: unlimited
Shorting options, also known as writing options, is still profitable as options more often than not expire out of the money. Shorting options without owning the underlying asset or options to offset the risk (writing naked options) is like x100'ing during hardware maintenance.
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BTC option: a plain option.
USD option: an option with fixed USD value, varying BTC value.
IV option: an option with fixed IV, varying BTC value. Usually option premiums will increase more so if IV increases.
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Expiration days are on Fridays, 0800 UTC. Weekly, monthly, quarterly (3 months), and 6 month options are available to trade, and understandably the longest option contracts are most expensive due to having more time to speculate.
Conclusion
So there you have it a pretty basic run through of Deribit Bitcoin options. This article just skims the surface for Bitcoin options and options in general. However this is a nice base. Now you can completely disregard this article and YOLO your hard earned Bitcoin on BTC 50,000$ EOY call contracts like a real man.