Options

The options we offer are European, vanilla options. When you enter long option position (buy), you pay the premium and receive the right to exercise at the option strike price, at the time of expiration, whereas when you enter short position (sell), you receive the premium upfront while being obliged to satisfy the amount due to the long side at expiration.

Options are standardized analogically to futures. Their underlying is BTCUSD exchange rate and each option has $100 notional value, which means that they are fully compatible for hedging and arbitrage with futures on Quedex and other exchanges, such as OKCoin and BitMEX.

Options' maturities

Currently, there are at least 3 contract maturities, expiring on Fridays 8:00 UTC, just as in the case of futures.

  • weekly, expiring every Friday
  • monthly, expiring on last Friday of the month
  • quarterly, expiring on last Friday of March, June, September and December

Usually, there is also a bi-weekly option contract, whenever it is different than the monthly contract. Daily options coming soon.

Price Notation

Quedex supports two notation styles. The exchange matching engine operates in bitcoin notation, natural to bticoin-centric exchange. It treats Bitcoin as the home currency, and quotes the options:

  • in units of home currency, i.e. BTC
  • per one unit of foreign currency notional, i.e. US Dollar
  • using strikes in BTC per 1 unit of notional

An option contract on BTCUSD with notional amount of 100 USD might have a price of 0.0005 BTC, which means its value is 0.0005 * 100 = 0.05 BTC.

Inverse notation

For convenience, the strikes of options are displayed in the inverse notation in the web app. This functions as follows:

  • The option strike is the inverse of the bitcoin strike and is displayed in USD (inverse strike = 1 / bitcoin strike).
  • The option type is switched - buying a CALL in inverse notation is equal to buying a PUT in bitcoin notation, and conversely, buying a PUT in inverse notation amounts to buying a CALL in bitcoin notation. Selling a CALL is equal to selling a PUT in bitcoin notation, and selling a PUT to a selling a CALL.
  • The option price remains unchanged and is displayed in BTC per 1 unit of notional.

Valuation

In order to properly value options in inverse notation, you have to:

  1. Inverse the BTCUSD exchange rate to obtain the USDBTC exchange rate (= 1 / BTCUSD).
  2. Swap CALL with PUT.
  3. Invert the strike to obtain bitcoin strike.
Example
A CALL option with strike 350 is in fact a PUT option with strike 1 / 350 = 0.002857143 in bitcoin notation.

Assuming current underlying BTCUSD price of 375, the above mentioned CALL should be valued as PUT with strike 0.002857143 and underlying USDBTC price 1 /375 = 0.002666667.

Margining

Long option position (the buyer) is not margined (initial and maintenance margin equals 0), but has to pay the option premium when entering the position.

Short option position (the seller) is margined, so as to be able to satisfy the amount due to the long side at expiration. See how margin is exactly calculated in margin calculations below.

Profit and Loss for options is not inculded in the margin calculations and is not added to the balance - currently, the options are equity style (see e.g. ICE's equity vs. futures style). This means that the only way to realize profits from an option trade is to exercise it (hold until expiration) or close the position. However, when a trade happens, the option premium is added to or subtracted from the daily unsettled Profit and Loss. This will change in the futures.

Exercise and settlement

Options are exercised automatically at the expiration (immediately after the closing auction) when it's profitable for the long side, i.e. when the option is in the money and the profit covers exercise fee. The exercise fee is subtracted from both sides.

Currently, all options are financially settled, which means that no underlying asset (e.g. US Dollars) is transferred. How settlement price of the underlying assets is calculated is explained in the settlement article.


Margin calculations

Margin of a long option open position is 0. If submitting a buy option order, you have to have enough funds to pay the option premium (and fee):

option premium = price * notional amount

where:

  • price - limit price for buy order, current price for open position (see calculation below)
  • notional amount - notional amount of the option

Margin of a short option open position:

 margin = margin percent * underlying BTC price * notional amount 
               * quantity + option premium 

where:

  • margin - initial or maintenance margin
  • margin percent - initial or maintenance margin percent, respectively (value available on contract's details page)
  • underlying BTC price - current underlying price of the futures contract with the same maturity in bitcoin notation, i.e. 1 / USD price (futures prices are used as best estimators of the price at expiration)
  • quantity - position quantity
  • option premium - as defined above, for the current option price

Margin for a sell option order is calculated as defined above with price equal to max(limit price, best buy price), quantity equal to order quantity and option premium equal to 0.