# Options Guide

Options are a class of derivative contracts that give a buyer a right to buy or sell an underlying asset at a specified price prior to or on a specified date. The seller of the options contract has the corresponding obligation to fulfill the transaction (i.e. to sell or buy) if the buyer “exercises” the option.

At Delta Exchange, we offer call and put options on BTC and ETH. All these are European options (i.e. they can only be exercised on expiry) and are available for a multitude of strikes and expiry dates.

## Options Symbology

The symbols of all options contracts on Delta Exchange are based on the following scheme:

**ProductSymbol-UnderlyingSymbol-StrikePrice-ExpiryDate**

**ProductSymbol:**specifies which product category a given contract belongs to. Currently, it can take the following values:

ProductSymbol | Product Type |

C | Call |

P | Put |

**UnderlyingSymbol:**is the symbol of the underlying asset of the options contract. Currently, we offer options on BTC and ETH.**Strike Price:**is the strike price of the option.**ExpiryDate:**is the date in ddmmyy format at which the option expires. On Delta, all options expire at 5:30pm IST.

**Examples**

C-BTC-50000-200821: this is the symbol for a BTC call option which has a strike price of 50000 and expires on 20th August 2021

MV-BNB-200-300421: this is the symbol for a BNB contract which has a strike price of 200 and expires on 30th April 2021

## Options Mark Price

Open positions in option contracts are marked at fair mark price. The fair mark price is computed by averaging the bid and offer price from the order book for a pre-specified order size, aka impact size. The mark price thus obtained is constrained within a band defined by the risk engine of Delta Exchange. The risk engine maintains a proprietary model for implied volatility (IV). The fair mark price band is this computed as:

$Fair\ Mark\ Price\ Min = Black Scholes Price (IV: model\ IV - 25\%)$

$Fair\ Mark\ Price\ Max = Black Scholes Price (IV: model\ IV + 25\%)$

If the fair mark price computed from the order book lies outside the mark price band, it will be capped at either Fair Price Min or Fair Price Max, whichever is relevant in the situation. The fair mark price band is enforced to prevent manipulation of mark price.

Please note that mark price does not impact realised profit/loss. When you close an open position, a trade happens by matching your close order against orders in the order book. The execution price of this trade determines your realised profit/ loss. However, mark price is used for decisions on liquidation of short positions.

## Options Settlement

All options contract settle at 5:30 PM IST The settlement price of an options contract is computed using its strike price and the 30 minute TWAP (Time Weighted Average Price) of the index (i.e. spot) price of the underlying asset. The settlement price is determined using the following formulae:

Call options

$Settlement\ price = max (30minTWAP(\ index\ price) - strike\ price,0)$

Put options

$Settlement\ price = max (strike\ price - 30minTWAP(\ index\ price),0)$

At expiry, all open positions are closed at the settlement price. Settlement prices of expired contracts are available on this page.

## Options Launch Schedule

Daily, weekly, monthly and quarterly maturities are available depending on the underlying. Following nomenclature has been used while specifying a particular maturity:

D1 : Option expiring within 24 hours

D2 : Option expiring within 24-48 hours

W1 : Option expiring on the current week’s Friday

W2 : Option expiring on the next week’s Friday

W3 : Option expiring on the next to next week’s Friday

M1 : Option expiring on the current month’s end Friday

M2 : Option expiring on the next month’s end Friday

M3 : Option expiring on the next to next month’s end Friday

Q1 : Option expiring on the current quarter’s end Friday

Q2 : Option expiring on the next quarter’s end Friday

Y1 : Option expiring on the current year’s end Friday

Whenever a new maturity is launched, a specified number of strikes are launched at a given strike difference at 5:30 PM IST. e.g. D1 & D2 option chain is launched at 5:30 PM daily and weekly option chain is launched at Friday 5:30 PM IST. Subsequent to the launch, options are put for 5 mins auction for price discovery and order placement.

As the market moves, the new strikes are launched for an existing maturity according to a specified delta range or minimum number of strikes below/above ATM, whichever has a wider range. For example, if BTC has a delta range of 0.1-0.9 and minimum number of strikes of 15, all the unavailable strikes between 0.1-0.9 delta are launched as the market moves. Also, all the strikes within ATM +/- 7*strike differences are launched if not covered by the previous criteria. Strike discovery happens every 5 minutes for all the option chains.

**Specifications for BTC**

Available Maturities : D1, D2, W1, W2, W3, M1, M2, M3

Delta Range : 0.2-0.8

Maturity | Strike Difference | Maturity Launch | Min Strikes |
---|---|---|---|

D1 | 100 | T-2 | 15 |

D2 | 250 | T-1 | 10 |

W1 | 1000 | Fri | 10 |

W2 | 1000 | Fri | 10 |

W3 | 1000 | Fri | 5 |

M1 | 1000 | Month End Fri | 12 |

M2 | 2000 | Month End Fri | 6 |

M3 | 5000 | Month End Fri | 6 |

**Specifications for ETH**

Available Maturities : D1, D2, W1, W2, W3, M1, M2, M3

Delta Range : 0.2-0.8

Maturity | Strike Difference | Maturity Launch | Min Strikes |
---|---|---|---|

D1 | 20 | T-2 | 10 |

D2 | 50 | T-1 | 10 |

W1 | 100 | Fri | 10 |

W2 | 100 | Fri | 10 |

W3 | 100 | Fri | 5 |

M1 | 100 | Month End Fri | 12 |

M2 | 200 | Month End Fri | 6 |

M3 | 500 | Month End Fri | 6 |

## PnL Computation

**Determine the option premium**: The option premium is the price paid by the buyer to the seller for the option contract. The premium is influenced by several factors, including the underlying asset price, implied volatility, time to expiration, and interest rates.**Calculate the breakeven price**: The breakeven price is the price at which the option buyer neither makes a profit nor a loss. For a call option: Breakeven price = strike price + option premium For a put option: Breakeven price = strike price - option premium.**Determine the profit or loss**: For a call option: Current market price > Breakeven price then Profit else Loss For a put option: Current market price < Breakeven price then Profit else Loss

*Examples*

**Call option**: You buy a call option on Ethereum with a strike price of $3,000 and a premium of $200. The option expires in 60 days. The current market price of Ethereum is $3,500.

Breakeven price: $3,000 + $200 = $3,200.

PnL: $3,500 - $3,200 = $300.

Therefore, your PnL is $300, and you have made a profit on the option contract.

**Put option:** You buy a put option on Ethereum with a strike price of $3,000 and a premium of $200. The option expires in 60 days. The current market price of Ethereum is $2,500.

Breakeven price: $3,000 - $200 = $2,800.

PnL: $2,800 - $2,500 = $300.

Therefore, your PnL is $300, and you have made a profit on the option contract.

**Short call option**: You sell a call option on Bitcoin with a strike price of $60,000 and a premium of $1,000. The option expires in 45 days. The current market price of Bitcoin is $55,000.

In this case you have made a profit on the option contract, as the buyer did not exercise their option and the premium was collected as profit.

**Short put option**: You sell a put option on Ethereum with a strike price of $500 and a premium of $50. The option expires in 15 days. The current market price of Ethereum is $550.

In this case you have neither made a profit nor a loss on the option contract, as the buyer did not exercise their option and the premium was collected as profit.

## Understanding Leverage

Leverage has a multiplier effect on your trading returns. This is best illustrated with an example. Let's say you have $100 and you want to trade options on BTC, which is currently priced at $10,000.

**Without leverage (buying an options contract)
**You can buy a call option with a strike price of $11,000 and an expiration date of one month from now. The premium for this option is $100. If BTC rises to $11,500 by expiration, the option is now worth $500 and your profit is $400 (the option's value minus the premium paid).

**With leverage (buying options contract using margin)
**Now let's assume you want to apply leverage by using margin to buy the same call option. Let's assume you take leverage of 10:1, which means you only need to put down $10 as margin to control $100 worth of options.

You buy the same call option for a premium of $10, using $10 as margin. If BTC rises to $11,500 by expiration, the option is now worth $500 and your profit is $490 (the option's value minus the margin paid).

As you can see, leverage has greatly amplified your returns in this scenario. However, it's important to remember that leverage can also magnify losses. In the event that BTC drops below the strike price by expiration, the option would expire worthless and you would lose your entire margin. So be sure to use leverage with caution and only if you have a solid understanding of the risks involved."

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