# Option Spreads

Spreads contracts are a combination of two options , one of them is long and other is short. There are two type of spread contracts:

1. Call Spreads : Lower strike call option is long and higher strike call option is short
2. Put Spreads: Higher strike put option is long and lower strike put option is short

## Motivation and Use Cases

Spread contracts provide a means to take a long/short view on the market with measurable risk. For option sellers, risk is limited as max loss is fixed. For example, a BTC call spread with a strike difference of 500$ can get a max theoretical price of 500$. Therefore, option sellers can’t lose more than 500$ even if BTC moves by more than 5000$.

For option buyers, premiums are lower with a limit on the upside. If a trader is bullish on the market but doesn’t see a very large move, he/she can long call spread with lower premiums.

## Advantages of Spreads

One can take a synthetic spread position by going long one leg of option and shorting another leg. However, with the current spreads and fees in crypto options, the entry-exit cost of this transaction is very high. It renders the trade less viable as potential profit opportunities are substantially lowered by transaction costs. Spreads solve this problem,  in addition to offering several other benefits as described below:

1. Spreads costs are cut by more than 50% as  a single leg is traded, rather than two legs on entry and exit each.
2. Transaction costs are reduced by more than 50%.
3. Leverage can be as high as 300x, so margin requirements are significantly lower than trading two single legs.

## Specifications of spread contracts

### Symbology

\
Call spreads are denoted by ‘CS’ and put spreads by ‘PS’. General symbology is:\
\
**CS/PS-Underlying-Long strike- Short strike-Maturity**

\
For call spreads, the lower strike is long and is the first strike. For put spreads, the higher strike is long and is the first strike.

**Examples**\
\
Call Spreads: CS-BTC-30000-32000-28Jul23

CS: Call Spread\
Underlying: BTC

Long Strike : 30000

Short Strike : 32000

Maturity : 28-Jul-23\
\
Put Spreads: PS-BTC-30000-28000-28Jul23

PS: Call Spread\
Underlying: BTC

Long Strike : 30000

Short Strike : 28000

Maturity : 28-Jul-23

### Margin Requirement

Minimum margin requirement\
\
Initial Margin% = min (0.5%, (Strike2 - Strike1)/Spot)

Maintenance Margin% =  min (0.25%, 0.5\*(Strike2 - Strike1)/Spot)

Margin computation methodology is similar and margin requirements scale with the position size same as in for other contracts

### Settlement Price

Settlement price of a call spread is computed as per the following equation:\
\
min(max(0, Spot Settlement Price - Strike1), Strike2-Strike1)\
\
And, for put spreads as per the following equation:\
\
min(max(0, Strike1- Spot Settlement Price), Strike1-Strike2)\
\
Here, spot settlement price is 30 min TWAP if the underlying price at settlement time.

### Launch Schedule

Daily options are launched at 5:30 PM everyday along with other daily options. Weekly options are launched every Friday at 5:30 PM. 

Options would be launched on daily, 2 day and weekly maturities. At launch, there will be six call spreads and six put spreads products. 

Further details are specified below for call spreads:

<table data-header-hidden><thead><tr><th>Maturity</th><th width="105">d </th><th>Strike1</th><th>Strike2</th></tr></thead><tbody><tr><td><strong>Maturity</strong></td><td><strong>d</strong></td><td><strong>Strike1</strong></td><td><strong>Strike2</strong></td></tr><tr><td>Daily</td><td>100</td><td>ATM</td><td>ATM+d, ATM +2d, ATM +3d</td></tr><tr><td><br></td><td><br></td><td>ATM +d</td><td>ATM +2d</td></tr><tr><td><br></td><td><br></td><td>ATM +2d</td><td>ATM + 3d</td></tr><tr><td>2 Day</td><td>200</td><td>ATM</td><td>ATM+d, ATM +2d, ATM +3d</td></tr><tr><td><br></td><td><br></td><td>ATM +d</td><td>ATM +2d</td></tr><tr><td><br></td><td><br></td><td>ATM +2d</td><td>ATM + 3d</td></tr><tr><td>Weekly</td><td>500</td><td>ATM</td><td>ATM+d, ATM +2d, ATM +3d</td></tr><tr><td><br></td><td><br></td><td>ATM +d</td><td>ATM +2d</td></tr><tr><td><br></td><td><br></td><td>ATM +2d</td><td>ATM + 3d</td></tr></tbody></table>

\
Example:

Underlying: BTC

Maturity : daily

Spot : 30000

ATM: 30000

d = 100

List of the call spreads that will be launched:\
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C-BTC-30000-30100\
C-BTC-30000-30200

C-BTC-30000-30300

C-BTC-30100-30200

C-BTC-30100-30300

C-BTC-30200-30300

List of the put spreads launched will be:\
\
C-BTC-30000-29900\
C-BTC-30000-29800

C-BTC-30000-29700

C-BTC-29900-29800

C-BTC-29900-29700

C-BTC-29800-29700

<br>


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