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EducationalNovember 2, 2020

Turbo Options for Bitcoin

Shubham Goyal
Chief Business Officer
November 2, 2020

What are Turbo options for Bitcoin?

The Turbo option is a derivatives instrument – one that derives its value from an underlying asset. In this particular case, Turbo options for Bitcoin have Bitcoin (BTC) as their underlying asset. Turbo options merge together vanilla call and put options and a knock-out barrier to create a different return/ risk profile.

Turbo call and put options are essentially consumer-driven products; they provide retail traders with the opportunity to capture upside in Bitcoin’s value – for only a fraction of the price and relatively lower capital risk.

How do Turbo options for Bitcoin work?

As mentioned before, Turbo options for Bitcoin take some of a vanilla option’s characteristics and tweaks them a bit. So, to understand how Turbo options work, let’s first see how vanilla call and put options work and how Turbo call and put options are different from them.

A vanilla option gives its holder the right to buy or sell its underlying asset at a predetermined point of time in the future at a fixed price. However, with vanilla options, the holder isn’t obligated to complete the trade.

A knock-out option, on the other hand, is one of the exotic options (options that have more complex features than the regular vanilla options); a knock-out option is known as a barrier option. The defining trait of a barrier option is that when the price of its underlying asset reaches/ moves past the predetermined price level within the predefined period of time, it either comes into existence, or ceases to exist altogether.

A knock-out option ceases to exist – as in, it is knocked out- when the price of its underlying asset reaches or breaches the fixed price level.

So, when Turbo options combine vanilla call and put options with a knock-out barrier, there’s no fixed expiry date. When a Turbo option has Bitcoin as its underlying asset, it expires instantaneously (i.e. gets knocked out) when Bitcoin’s value reaches or crosses the pre-decided knock-out barrier.

The expiry date of a Turbo option for Bitcoin is determined by two price levels, which are:

  1. Strike Price: This is the set price of a Turbo option at which the holder of the option can buy or sell its underlying Bitcoin.
  2. Knockout Price: This is the price level which, once Bitcoin’s spot price is reached or crossed, will lead to the immediate expiry of the Turbo option.

Since there’s always the risk of the option expiring prematurely, it helps reduce the price of Turbo options for Bitcoin, and therefore increases the inherent leverage of Turbo options.

How?

Well, the inherent leverage in a Turbo option for Bitcoin is directly connected to the relative position of Bitcoin’s price and its own knock-out price. The closer the exchange rate is to the knock-out price, the higher the plausibility of the option in question getting knocked-out; which then proceeds to decrease the option’s price. Now, since the contract size stays as it was, as the Turbo option’s price goes down, the effective leverage it offers parallelly goes up.

bitcoin options

Types of Turbo options for Bitcoin:

Turbo options for Bitcoin can be categorized into the following two types:

  1. Turbo Call Options: Turbo call options increase in value when the spot price of Bitcoin moves up. Therefore, a long position in a Turbo Call is similar to a leveraged long position in the underlying Bitcoin.
  2. Turbo Put Options: Turbo put options increase in value when the spot price of Bitcoin heads down. So, a long position in a Turbo Put is about the same as a leveraged short position in Bitcoin.

Turbo options from Delta Exchange:

  1. The Turbo options for Bitcoin offered on Delta Exchange are always deep in the money. A call or put option is said to be ‘in the money’ when its strike price is lesser or greater than the current price of its underlying asset. The more the money-ness of an option, the more it starts to behave like a future. This means a position in one of the Turbo call options from Delta acts like a leveraged long Bitcoin position. Similarly, when it comes to a Turbo put option, a position behaves like a leveraged short position in Bitcoin.
  2. A Turbo option for Bitcoin instantly expires when Bitcoin’s spot price exceeds the knock-out price. A position in one of the Turbo options must be closed at the time of the option’s expiry and has a fixed stop loss at the fixed knockout barrier. A knocked out option does not have any residual value.
  3. Only the designated market makers can take up net short positions in Turbo options for Bitcoin. All other traders would be allowed to take up long positions only.
  4. Since long options positions can never get liquidated, a long position in a Turbo option for Bitcoin would never be liquidated either.
  5. The leverage of Turbo options for Bitcoin, at the time of launch, is 200x. As Bitcoin’s spot price moves towards or moves away from a particular option’s knock-out price, the leverage goes up or down in accordance with it.
  6. For the Turbo options for Bitcoin available on Delta Exchange, the barrier price will be at 0.5% below Bitcoin’s spot price, and a mandatory call feature will give the seller the right to call the option once the barrier price is hit.
  7. Turbo options for Bitcoin will be settled daily in Bitcoin, of course, with weekly and monthly settlements following up.
  8. The Turbo options for Bitcoin have a lifespan of one day. Everyday, new Turbo options are listed at 11:55 am UTC. The actual trading in these options begins 5 minutes later at 12 pm UTC, and unless knocked out, they are all settled the following day at 12 pm UTC.
  9. Turbo options for Bitcoin do not require any trading fees, so both maker and taker fees are zero. You can check out the trading fees schedule for all the contracts listed on Delta Exchange here.

Mechanisms of Turbo Options for Bitcoin:

1. Pricing:

As mentioned before, the Turbo options for Bitcoin are deep in the money, and they can be priced as delta-one instruments. Therefore, the fair value of these options would be:

  • For Turbo Calls:

Fair value = spot price – knock-out price + (spot price * time-to-expiry * funding rate)

  • For Turbo Puts:

Fair value = knock-out price – spot price + (spot price * time-to-expiry * funding rate)

Funding Rate is the implied cost of carry for a long position. While not directly observable, the funding rate can be computed from the prices in the order book.

The narrower the distance between the Bitcoin spot price and the knock-out price, the lower is the fair value of a Turbo option.

2. Mark Price:

Turbo options for Bitcoin are marked at the absolute value of the gap between the spot price of Bitcoin and the knock-out price.

So,

Mark price = absolute (spot price – knock-out price)

For Turbo call options for Bitcoin, the spot price must always stay above the knock-out price because it’d expire instantly if the spot price goes below the knock-out price.

Alternatively, when it comes to Turbo put options for Bitcoin, the spot price has to stay above the knock-out price to avoid expiration.

3. Profit/ Loss Equation:

The Premium for a long Turbo option for Bitcoin trade is directly subtracted from the available balance. The cash flow that is received after a long position in a Turbo option is closed is referred to as the pay-off. The profit or loss of a long position in a Turbo option for Bitcoin can be determined through this:

Pay-off = number of contracts * contract value * mark price

Premium = number of contracts * contract value * entry price

Profit/loss = pay-off – premium

So, Profit/loss = number of contracts * contract value * (mark price – entry price)

Why and When Should You Trade Turbo Options?

Holding a long position in a Turbo Call option for Bitcoin is the same as holding a leveraged long position in Bitcoin itself; on the flip side, holding a long position in a Turbo Put option is similar to holding a leveraged short position in Bitcoin. So depending on whether your view and projections on Bitcoin are bullish or bearish, you can consider trading in Turbo call or put options for Bitcoin.

Turbo options for Bitcoin provide traders with the choice to capture the upside in Bitcoin at a marginal risk, which is a great reason for you to consider trading Turbo options- this way, you get all the additional benefits of derivatives trading along with the potential profits while doing so.

You should buy Turbo call options when you are bullish on the value of Bitcoin. Similarly, consider buying a Turbo put option when you are bearish on Bitcoin’s price.

Examples:

Let’s now take a look at some examples to see how Turbo options for Bitcoin trading work out.

Let’s suppose person X buys 1000 Turbo call options for Bitcoin for USDT 100, with the strike price being INR 10,000 and the knock-out price being INR 11250. At the time, let’s assume Bitcoin’s spot exchange price is INR 11345, and the Turbo option is about to expire within 6 hours.

Situation 1: Bitcoin’s spot price goes to INR 11248 after 2 hours

Now, since the spot price has gone below the knock-out price, the contracts expire immediately with a residual value of 0. Person X has to bear a loss of 100 USDT.

Situation 2: Bitcoin’s spot price is INR 12000 when the Turbo call options expire 6 hours later

At the time of settlement the next day, person X gets a payment of 750 USDT. So they get an overall profit of (750 – 100) USDT = 650 USDT in this trade.

Situation 3: Bitcoin’s spot price is INR 11300 when the Turbo call options expire 6 hours later

At the time of settlement the next day, person X receives a payment of 50 USDT. This time, they suffer a loss of 50 USDT in the trade. [(50 – 100) USDT = – 50 USDT].

Before trading in Turbo options for Bitcoin, however, you must remember that they are exotic derivatives with a lot of chances and risks associated with them. Therefore, unless you’re an experienced crypto trader with a good understanding of the Bitcoin market and its price volatility, it would probably be for the best if you stayed away from the Turbo options for now.

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