Options Explainer

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Disclaimers:

  1. None of this is investment advice.
  2. Much of the below analysis ignores any difference between futures and spot prices, and ignores the effects of fees.
  3. Options, like the rest of FTX, are not being offered to US users.

 

What Are Options?

An option is a contract that gives the holder the right, but not the obligation, to buy/sell something at a predetermined date and price.  There are two primary types of options: calls and puts.

Option Parameters

  • Type: "Call" or "Put"
    • Call means "right to buy"; Put means "right to sell"
  • Strike price
    • The price you have the right to trade at in the future
  • Expiration time
    • The time you have to decide whether or not to exercise your option
  • Underlying
    • The asset you have the right to buy/sell

Examples

Take the following option (A):

  • Type: Call
  • Strike Price: 7300
  • Expiration Time: 2020-01-15 15:00:00 UTC
  • Underlying: BTC

If you were long 1 contract of A.  That would mean that, on 2020-01-15, you would have the right to buy 1 BTC for $7300 if you wanted.  So, if BTC spent 2020-01-15 at $7450, A would be worth $150: you'd buy something worth $7450 for a price of $7300.  If, on the other hand, BTC spent 2020-01-15 at $7100, A would be worth 0: you would choose not to buy the BTC for $7300.

 

Take the following option (B):

  • Type: Put
  • Strike Price: 7300
  • Expiration Time: 2020-01-15
  • Underlying: BTC

If you were long 1 contract of B.  That would mean that, on 2020-01-15, you would have the right to sell1 BTC for $7300 if you wanted.  So, if BTC ended 2020-01-15 at $7450, B would be worth 0: you'd choose not to sell 1 BTC for $7300.  If, on the other hand, BTC ended 2020-01-15 at $7100, B would be worth $200: you would be able to sell a BTC for $7300, despite it being worth only $7100.

Formula

This means that, once an option expires, its value is:

Call: Max(0, expiration price - strike price)

Put: Max(0, strike price - expiration price)

 

Trading Options

Options trade like futures.  You can go long or short options using leverage.  At the expiration time, the futures contract settles to an amount of dollars equal to its expiration price.

Expiration

FTX's options cash-expire to USD. Note that the expiration price of BTC at any time T is the average of the FTX BTC index in the hour before T.

Say that you short-sold 3 of option A above at an average price of $250 each.  Then, say that BTC's expiration price was $7350 at expiration time.  That means each of A would be worth $50: it gives someone the right to buy a BTC for $7300, with BTC worth $7350 each.  Since you sold the options for $250 each, your PnL would be 3 * (250 - 50) = +$600.

On the other hand, say you bought 2 of option B above at an average price of $100.  Once again, assume that BTC's expiration price was $7350 at expiration time.  In that case, B is worth $0: you would choose not to sell BTC for $7300 each.  So you would have a PnL of 0 - 2 * $100 = -$200.

Note that when FTX options expire, you don't actually have to make the choice of whether to exercise them: FTX will do so automatically.  So if you hold a $7300 strike call and BTC is at $7350, it'll automatically credit you with $50 per call; and if you hold a $7300 put it'll automatically expire them to 0.

 

Buying/Selling

FTXOptionsRFQ.PNG

There are an infinite number of possible options: any set of strike price and expiration time.  Rather than list hundreds of orderbooks, options on FTX use an RFQ (request for quote) system.

To trade options, go to ftx.com/options.  There you can design the exact option you'd like to trade, choosing call/put, the strike price, the expiration date, the quantity, and whether you're buying or selling.  

Once you've designed your option, click 'Request Quote'.  Within 10 seconds, you'll see a bid or offer for the option you designed.  If you'd like to trade at that price, click 'ACCEPT'.  If not, you can choose not to trade.  You can also choose to leave the RFQ open for a while and wait to see what prices people show later.  By default your RFQ will disappear after 5 minutes.

Hovering over 'Accept Quote' or 'Limit Price' changes the PnL graph to reflect what'd happen if you made that trade

options_quotes.PNG

If you'd like to leave a quote out for others to trade against, you can set a 'limit price' in your RFQ.  Then, you'll leave your order displayed for all to see until you cancel it or it auto-cancels after 1 day; if anyone wants to trade against your limit price they can.

You can also hide your limit price. If a quoter's price crosses your limit price, you will be considered the taker if your limit price was hidden.

There is also a 'Close' button on each position row. 

 

Quoting

show_options_quotes.PNG

If you'd like to quote prices for other user's RFQs, you can do so via either the GUI or API.

To quote via the GUI, watch the table of current options requests.  You can click on any option; this will open up a menu where you can show a quote.

The requester will be shown whichever quote is most aggressive.

Note that you are not told before hand whether the customer is buying or selling; you have to provide a 2-sided quotation.  However, the customer will only be shown the direction they are looking for.

 Your quote will disappear after 10 seconds.  You can refresh with a new quote if you want.

Please note that the 'Best Quote' column displays the price per BTC.  

Margin and Balances

See here for an article on options balances and margin.

 

Printing OTC trades

You can print OTC options trades you've done on FTX!  FTX will manage the margin etc.  In order to print an OTC trade:

  1. You and the other party both need FTX accounts (or you could use subaccounts etc.)
  2. Go to ftx.com/options and click 'REQUEST QUOTE'
  3. Enter the details. Click 'Private OTC Trade' and enter the other user's account ID
  4. The other user will see it appear under 'ALL REQUESTS' and can accept it. No one else can see it.
  5. The trade will appear in both users options portfolios!

 

Fees

Options usually have the same fees as MOVE contracts.  That is: one BTC option charges the same fees, in USD, as one BTC-PERP does.  So if BTC is trading at $7000, your fee rate is 0.05%, and you buy 1 BTC call, you'll pay $3.50 in fees.

However, because far out of the money options might trade at very low prices, we additionally cap the fees on options.  So the fee formula for options is:

Fee = Fee Rate * BTC Price * X

Where:

Fee rate = your normal fee percentage (e.g. 0.05%)

BTC price is the price of a bitcoin at the time of the trade

X = Min[1, Option Trade Price / (1% of BTC price)]

So, if you bought a $15,000 strike call for $5 when BTC was trading at $10,000 and you normally paid 0.05% fees, your full fees would be: 0.05% * $10,000 * Min[1, $5 / (1% of $10,000)] = $0.25.

If A asks for a quote, B shows a price, and A accepts that price, then A is the taker and B is the maker.  If A shows a limit price that B trades against, then A is the maker and B is the taker.

PnL

Say that you do the following options trade:

  • Type: call
  • Size: S
  • Price: P
  • Strike: K
  • Expiration price: E

Putting together the above formulas, your PnL is:

S * [Max(0, E - K) - P]

If it were a put instead, your PnL would be:

S * [Max(0, K - E) - P]

Where S is positive if you bought the option and negative if you sold.

PnL Graph

The options page has a graph of the PnL of your open options positions.  Some notes about this graph:

  • It ignores fees
  • It assumes all open options positions expire to a single BTC price
  • It ignores liquidation risk
  • It ignores collateral PnL or conversions
  • It is PnL vs the entry price of your positions rather than the current BTC price

 

Details

  • FTX options are European style
    • You cannot exercise early
  • FTX options are cash settled
    • FTX settles PnL in USD rather than exchanging the underlying token
  • FTX options auto-expire
    • FTX will automatically exercise all options in the money and no options out of the money, maximizing PnL.
  • All FTX options expire on their stated expiration date at 3:00:00AM UTC.
    • The expiration price of the underlying is based on a 1-hour TWAP of the underlying index the hour before expiration.
  • FTT works the same way for options that it does for futures: you can use FTT as collateral for options, and 1/3 of fees generated from options will turn into a buy and burn of FTT.

 

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