- 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.
Note: This article has more details on how options work on FTX.
Your full FTX account has balances in two places: your main wallet at ftx.com/wallet (futures wallet), and you POSITIONS box at ftx.com/options (options wallet). To get your full FTX balances, you add the two together. Note that we display the futures wallet collateral on the options page as well, as "Available collateral".
Let's walk through an example here.
Positions and Balances
To start off with, this account has one options position, represented by [A]. The account owns one Call option with a strike price of $5000.
When this screenshot was taking BTC was trading at roughly $6700. That means that the call option was worth at least $1700, and likely more.
In addition, your options wallet has a USD balance, represented by [B]. Here it has -$1747. This does not represent the total value of the options account; the total value is the sum of the options and the USD.
The risk engine will automatically maintain enough USD in your options wallet, if possible, to keep you above your initial margin for options (defined below, but roughly enough buffer for a 5% move in the underlying). Any additional USD will be returned to your futures wallet.
Finally, this account still has some USD left in its main futures wallet, represented by [D]. In this case, it has another $57 left.
Total Wallet Collateral
The total options wallet value is the sum of the values of [A] and [B]. It's not totally clear what the value of an option is, though! If you think that call option is worth $1700, then this options wallet has a value of roughly -$50; if you think the call option is worth about $2000 then the options wallet here is worth about $250.
The account's overall total collateral is [A] + [B] + [D]. In this case that's roughly -$1750 + $50 + (a 5k strike call expiring in May 2020). Note that the account might have more assets tied up in open orders, futures collateral, or other uses.
This means that the total USD values you'll see ([B] + [D]) do not depend on the value of the option [A]. So you should add what you think the option is worth to those. The way that [B] is determined is by the risk engine (below) deciding how much collateral your options require. If [B] is negative, that means you're long options and they are effectively acting as collateral; that much USD is then moved from [B] to [D]. If [B] is positive that means you're short options and so you require some USD to collateralize it; that's taken from [D].
Flow of Funds: An Example
Prior to purchasing the option, the account looked like this:
After buying 1.5 of the calls at $2448 each, it looked like this:
So what happened?
- The user started out with about $1977
- The user spent about 1.5 * 2448 = $3672 on the call options
- After fees, the user had about -$1690 left, in addition to the call option.
- The risk engine decided that the conservative price of the call option was roughly $1165 each, or about $1750 total for the 1.5; so it put roughly -$1750 USD in the options wallet, leaving about $50 for the futures wallet.
- Note that the option might in fact be worth more than the conservative risk price; the difference between the average valuation of the option and the conservative risk price is the equivalent of the maintenance margin required to hold it. In this case it definitely is worth more--it was worth at least $1700 given the price of BTC at the time, and likely more.
- The risk engine requires your account to be able to survive a market move (in this case ~5%), and so it required more collateral.
Conservative Options Value
First, we take the options positions ([A] above). We use conservative portfolio margining on them. This means that we do the following:
- Say your required margin is M. The required initial margin (IM) is 5% (or 1/[main account max leverage], whichever is higher); the required maintenance margin (MM) is 2%.
- We get implied volatility from MOVE contracts.
- For each options position you have, we take the three MOVE contracts whose strike price hasn't been determined yet and have expiration closest to the option.
- We calculate the implied volatility of that option using the Black Scholes model.
- (mark price / sqrt(([1 day if daily MOVE, 7 days if weekly MOVE, 80 days if quarterly MOVE] - 1 hour) in days) / BTC index price
- We calculate the value of your options positions using Black Scholes with the following assumptions:
- Volatility is either max(half the lowest, one quarter the median) or min(twice the highest, four times the median) of the three MOVE contracts' implied vols
- Underlying (BTC) price is either the current price, M lower, or M higher
- This would mean MM = 2% if you're looking at liquidations and IM ~ 5% if you're looking at opening a larger position
- Note, to be clear, that we use spot BTC prices, not futures prices, as the reference for the calculation
- We choose whichever of these 6 choices makes the value of your options portfolio the lowest; call this the conservative valuation.
- We make one choice for the entire options portfolio; so we'll take whichever BTC price is most conservative overall but we won't use different BTC prices for different options
- This means that we use portfolio margining for options
- The conservative valuation we get from (4) is what we use for risk purposes.
- If your conservative valuation using MM goes below 0, you will get liquidated.
- If your conservative valuation using IM goes below 0, you cannot open a larger position.
In other words, if your maintenance margin is 2%, we require that your options portfolio's valuation still be above 0 even if BTC moved 2% and volatility moved against your position.
You can find the conservative valuation of each option using the API. Note that this is not necessary to calculate your account balances.
FTX will automatically transfer extra USD collateral between your options and futures wallets. So we effectively cross-margin futures and options; any wins in one will offset losses in the other. This also means that, while the risk valuation of the options will not affect your total account collateral ([B] + [D]), it will affect how much FTX moves from [D] to [B] to collateralize your options positions.
The Estimated liquidation price ([C] in the picture) represents the BTC price such that, if volatility also moved against your position, your total FTX account value ([A] + [B] + [D]) would be 0. 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.
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/backstop, 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.
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