Deribit offers European style cash-settled options.
European style options are exercised only at expiry and cannot be exercised before. On Deribit, this will happen automatically.
Cash settlement means that at expiry, the writer of the options contract will pay any profit due to the holder, rather than transfer any assets.
The options are priced in BTC or ETH. However, the relevant price can also be seen in USD. The price in USD is determined by using the latest futures prices. Additionally, the implied volatility of the option’s price is also displayed on the platform.
A call option is the right to buy 1 BTC at a specific price (the strike price), and a put option is the right to sell 1 BTC at a specific price (the strike price).
Contract Specifications BTC
Contract Specifications ETH
Currently, only the market and limit orders are accepted by the matching engine. Additionally, an order can be a “post-only” order; however, this functionality is not available for advanced order types (explained below).
A post-only order will always enter the order book without being instantly matched. If the order were to be matched, our trading engine would adjust the order so that it enters the order book at the next best possible price.
If a trader places a buy order at 0.0050 BTC, but there is an offer for 0.0045 BTC, the price of the order will be automatically adjusted to 0.0044 BTC, so that it enters the order book as a limit order.
For options trading, the platform supports two additional advanced order types. The order book’s prices are in BTC and the options are priced in BTC. However, it is possible to submit volatility orders and constant USD value orders.
By filling the options order form, the trader can choose to determine the price in 3 ways: in BTC, USD, and Implied Volatility.
When an order is priced in USD or implied volatility, the Deribit engine will continuously update the order to keep the USD value and the Implied Volatility at the fixed value as entered in the order form. IV and USD orders are updated once per 6 seconds.
Fixed USD orders are useful when a trader has decided that he wants to pay X dollars for a certain option. Due to the changing exchange rate, this value is not constant in BTC, however, the order book works only with BTC. To maintain the constant USD value, the order will be continuously monitored and edited by the pricing engine.
The Deribit Index is used to determine the BTC price of the option in case there is no corresponding future expiring on the same date. If there is a corresponding future, the mark price of the future will be used. However, the future mark price is limited by bandwidth, which is benchmarked against the index - the value used for USD/IV orders cannot differ more than 10% from the index.
Volatility orders are orders, with pre-set constant implied volatility. This type of order makes it possible to market-make options series without additional market maker applications.
Automatic hedging with futures is not yet supported, however, is on the roadmap. Black's option pricing model is used to determine prices. Please note that prices are updated once per second. Fixed USD and Volatility orders are also changed by the pricing engine maximum once every second as it follows the Deribit price index. If there is a corresponding future, the future will be used as an input for calculating IV and USD orders.
Historical Volatility Chart
A chart of the annualized 15-day historical volatility of the Deribit BTC/ETH index is displayed on the platform.
Volatility is calculated by recording the value of the index once a day at a fixed time. The (annualized) BTC/ETH volatility is then calculated over a period of 15 days.
Due to various reasons, there can be a situation when options are traded at prices caused by an abnormal non-orderly market, with a high chance that one side of the trade has been done unwillingly. In such cases, Deribit might adjust the prices or reverse trades.
Price adjustments or reversal of options trades will be done only if the traded price of the options contract was further away than 5% from the theoretical price of the underlying options contract (0.05BTC for BTC options).
If an option is traded at a price of 0.12 BTC, but its theoretical price is 0.05BTC, the trader can request a price adjustment to 0.10BTC.
If a trader realizes that a trade has been executed at a price regarded as mispriced, he should write an email to the exchange (firstname.lastname@example.org) asking for a price adjustment as soon as possible.
The theoretical price of the option is the mark price, though it is difficult for the exchange to have the mark price exactly matching the theoretical price at all times. Therefore, in case of a disagreement about the theoretical price, this price will be determined by consulting with primary market makers on the platform. If there is any disagreement, Deribit will follow their recommendations as to what was the theoretical value of the option at the moment of the trade.
A request for a price adjustment has to be made within 2 hours after the execution of the trade. If for whatever reason the counterparty has already made a withdrawal of funds, and Deribit is not capable to retrieve enough funds from the counterparty, a price adjustment will only be made for the amount that was retrievable from the counterparty account. The insurance fund is not meant and will not be used for funding mistrades.
Market Making Obligations
The matching engine and risk engine are built from the ground up to be able to absorb a large number of orders in a very short period of time. It is a must for any serious options’ exchange due to a large number of assets. The platform is able to handle thousands of order requests per second with ultra-low latency, via REST, WebSockets, and FIX API.
Please note that at this moment we cannot accept any new market makers (other than those with whom we are already communicating and are preparing to connect).
Regarding market maker rules explained below, anybody placing quotes (bid and ask) on the same instrument or any trader having more than 20 options orders in the book via automated trading (via API) can be regarded as a market maker and can be forced to comply with the rules below.
Market Maker Obligations:
1. Market maker (MM) is obliged to show quotes in the market 112 hours per week. Quoting 2- sided markets outside allowed bandwidth outlined below is not allowed at any time.
2. Instrument coverage:
A market maker has to quote all expiries, and 90% of all option contracts with the delta between 0.1 and 0.9 in absolute terms.
3. Max allowed bid-ask spread: Under normal conditions default, max allowed bid-ask spread should be a maximum of 0.01, (delta of the option) * 0.04.
Delta of the option = BS delta as calculated by Deribit - Mark price as calculated by Deribit
As an example, monthly ATM calls should not be quoted wider than 0.02, delta 1.0 put should not be quoted wider than 0.04, etc.
4. Minimum quote size: 5 lots for options with effective delta 0.50 and below, 1 lot for higher delta.
5. Fast-moving market: 10% move in the past 2 hours.
6. No diming: A party gaining extra capacity for quoting (with more than 20 open orders) is not allowed to consistently alter its orders in reaction to changes in other participants’ orders to improve them by a small amount, as opposed to changing orders based on their own market view.