- None of this is investment advice.
- Much of the below analysis ignores any difference between futures and spot prices, and ignores the effects of fees.
- Options, like the rest of FTX, are not being offered to US users.
- This article describes how options are intended to work on FTX. As of 2020-01-12, FTX options are live but some of the below features, like limit orders, have not yet been implemented.
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.
- 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
- The asset you have the right to buy/sell
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.
This means that, once an option expires, its value is:
Call: Max(0, expiration price - strike price)
Put: Max(0, strike price - expiration price)
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.
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.
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
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.
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.
You can trade options on margin, like futures; you can be long or short options.
Say that your Options margin works as follows:
- We take your subaccount which has your portfolio of options
- We estimate how much the underlying would have to move in order for that portfolio to go to 0.
- This includes your collateral and the cost paid/received for the options: i.e., how much the underlying would have to move for your subaccount value to be 0.
- Say that it would take a move of size M for your options portfolio to go to 0.
- We determine this assuming that options are priced using the Black Scholes model
- we take the three non-struck MOVE contracts (i.e. MOVE contracts whose strike price isn't yet known) that expire closest to the option expiry date
- we assume a volatility equal to either twice the highest implied volatility of those three contracts or half the lowest implied volatility, whichever would put your net options portfolio in greater danger of liquidation.
- Note that we adjust for the duration of the MOVE contracts and the time left in the options assuming that volatility scales with the square root of duration.
- We only move your options positions according to this model, not your futures positions.
- We treat M as your current margin fraction. So if a 20% move would bankrupt your subaccount, we treat your margin fraction as 20% and your current leverage as 5x.
- We then treat options the same way we do futures.
- Your maximum leverage is limited both by your max account leverage, and by your position size.
- Because there is no orderbook, liquidations for options will happen entirely against the backstop liquidity providers. This means that if your options positions get liquidated it will probably result in your (sub)account having no funds left.
You'll see your options portfolio balances in the "Positions" table on the options page. Those balances are not included in your wallet balances. So your total account balances can be gotten by adding up those two tables. Note that for the purposes of displaying options balances, the options are treated as another asset--so you add the options values to your USD balances.
This means that options are portfolio margined with each other--in other words we look at the behavior of your entire options book together.
Your options book is in turn cross-margined with the rest of its subaccount. So that means that FTX will automatically transfer collateral in and out of your options portfolio to attempt to prevent liquidations in either place, but that FTX does not consider hedging between futures and options (although empirical correlations could result in your account being hedged and thus not losing PnL in the first place).
Note that, while there are customers on both sides of every trade, each customer faces FTX in the middle. That means that FTX centralizes margin/liquidation/risk/insurance, so you are not exposed to the specific counterparty risk profile of the other side of your trade.
Your account cannot get liquidated if all of the following are true:
1) You are long options and not short any options
3) You do not have any futures positions.
4) Your collateral is entirely USD.
Account Balances and Positions
Your total account balance is the sum of these three elements:
1) Your futures wallet balances at ftx.com/wallet
2) Your options in the position table at ftx.com/options
3) The USD balance in the position table at ftx.com/options
In other words, rather that marking the options to market (so they're worth approximately $0) and then showing the options portfolio value in the USD cell, the total value of your options portfolio is the USD cell plus the value of the options.
So for instance if you saw this for your options positions table:
That would mean that the total value of your options portfolio was approximately $8,100 (roughly the value of a 10-strike call) plus -$7,698, for a total account value of roughly $300. You could then add in your balances at ftx.com/wallet to get your full account value.
Note that we net out your positions. So if you buy 1 $9,000 strike call expiring on 2020-02-17 and then sell 0.4 back, you'll be left with 0.6; if you then sell the other 0.6 it'll be removed from your positions.
An equivalent way to think about this would be that you're long a 10-strike call and posting $300 as collateral for it; either way you're long the call and the total value of the options portfolio is around $300.
In addition, we show the "Available collateral". This is the amount of free USD in ftx.com/wallet not being used as collateral that could be moved over to put on a larger options position or prevent a liquidation.
Printing OTC trades
You can print OTC options trades you've done on FTX! FTX will manage the margin etc. In order to do print an OTC trade:
- You and the other party both need FTX accounts (or you could use subaccounts etc.)
- Go to ftx.com/options and click 'REQUEST QUOTE'
- Enter the details. Click 'Private OTC Trade' and enter the other user's account ID
- The other user will see it appear under 'ALL REQUESTS' and can accept it. No one else can see it.
- The trade will appear in both users options portfolios!
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
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.
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.
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
- 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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