How to Long Options PART 2 || Options Guide
PART 2 Contents
6. An introduction to the options order page
7. How to post call options
6. An introduction to the options order page
Let’s look at Screenshot 3 to explain the options order page in detail.
Red Figure 1 in Screenshot 3 at the top: the name of the contract
Red Figure 2 in Screenshot 3:
- “Limit order”:
It means that the price at which you can buy or sell options is limited to a price that you customize. The options market has low liquidity. To avoid slippage, you need to plan well the price at which the order will be placed. Deribit options have an upper and lower price limit of ±0.0400 BTC/ETH. Take this BTC-26MAR21–60000-C for example. The mark price is 0.1001 BTC. If it goes up or down by 0.0400 BTC, you will suffer a huge loss.
In particular, during periods of market swings, options quotes in the market will quickly disappear — some orders are filled; or market makers may deliberately widen the price gap to reduce risks or may even be unable to provide quotes.
- “Market order”:
The market order feature has recently been disabled on the Deribit’s official website. This feature is still available on the Greeks.live website. However, I would strongly discourage you from using market order to trade options.
Red Figure 3 in Screenshot 3:
It refers to the number of options. 1 option corresponds to the face value of 1 BTC spot.
But this is misleading. So, I will be more precise.
If the bitcoin price has surpassed the strike price when 1 call option is at expiration, the dollar return generated by every one dollar price increase will be the same as the return generated by the increase in 1 bitcoin spot.
If the bitcoin price has dropped below the strike price when 1 put option is at expiration, the dollar return generated by every one dollar price drop will be the same as the loss caused by the drop in 1 bitcoin spot.
- “Current Positions”:
A green figure refers to the number of call options of this contract you hold, whereas a red figure refers to the number of put options of this contract you hold.
Red Figure 4 in Screenshot 3: The three tags of BTC, USD and IV correspond to the following three ways to place an order.
- A BTC order
is placed at the absolute value of the premium in BTC. The 0.0990 in Screenshot 3 means to buy/sell options at 0.0990 BTC.
- A USD order
is placed at the price of the futures of the premium in USD. At least in my own case, I rarely choose this option.
- An IV order
is placed at the implied volatility of the option. The exchange will adjust the quote of the premium in real time based on the latest underlying (synthetic) futures price and the volatility you set. See Section 7 below for more details.
Red Figure 5 in Screenshot 3:
Vega, Theta, Gamma, and Delta are the four most common Greeks for options. For a detailed understanding, see Deribit Options Courses.
Red Figure 6 in Screenshot 3:
The most commonly used is “GTC (Good Till Cancel)”. GTC means that if an option order is not filled to the specified quantity or is cancelled by you, it will remain on the market. For example, to buy 10 options, you need to enter 0.1020 in the BTC premium price and click the green button “Buy”. In the top right corner of Screenshot 3, there is 1 sell order priced at 0.1015 and 1 priced at 0.1020. In total, there are two sell orders available with two different quotes. If both orders are filled, there are 8 option orders waiting to be filled. And the price 0.1020 becomes the best bid, whereas the best ask becomes 0.1025, with 23.5 options available.
(The following explanations will not be of concern to most users and will add to the confusion of ideas. You may come back to it when necessary.)
- FOK (Fill or Kill)
For example, if you wish to buy 10 calls, enter the BTC premium price 0.1020 and click the green button “Buy”. There are a total of 2 orders sold at a premium of 0.1020. So, the not all the 10 orders can be filled. As a result, the order will be withdrawn after it is submitted when the system finds that it cannot be fully filled. Let’s change the price of the 10 calls to 0.1025 and choose “FOK”. You can see that the total number of sell orders at the price of 0.1025 is 25.5, exceeding 10. So, the order can be filled.
- “IOC (Immediate or Cancel)”
For example, one wishes to buy 10 calls with the premium price set at 0.1020. There are two options priced no higher than 0.1020 (one priced at 0.1015; one priced at 0.1020). In this order placement mode, the part of the order with 2 calls can be filled and the part of the order with the remaining 8 calls will be immediately withdrawn without being filled.
- “Post Only”:
If you wish to buy 10 calls but wish not to fill taker orders and wish to go back to the market after placing an order, you may tick this option. Set the price at 0.1020. The best ask is found to be 0.1015. With this option ticked, the system will move the price back by one tick (0.0005 BTC) and post 10 buy orders at the price of 0.1010.
- “Reduce Only”:
It is related to the current positions. For example, the current positions are 10 calls. If “Reduce Only” is ticked, it is not possible to buy calls at this time as it would increase the original long positions; in this case, you can only sell puts so that the original positions can be reduced.
“Post Only” and “Reduce Only” are both features designed to prevent fat-finger errors.
Red Finger 7 in Screenshot 3:
“Order Book” reflects the prices and available quotes for a pending sell or buy order, as well as the cumulative price and market depth. The Greeks.live team has added “Mark Price” in the top right-hand corner here for reference when entering quotes to assess slippage or the positions of the quotes in the order queue.
Red Figure 8 in Screenshot 3:
“Recent trades” shows the fill price and the corresponding IV of the option contract traded in the most recent period. By observing the trend of the recently traded IV, you can have a good idea of how the IV of the market is changing. The time and date have been adjusted to UTC+8 by the Greeks.live team for your reference.
7. How to post call options
It is relatively easy to fill a taker order. Simply observe the quotes in the order book; aim for a price that you are comfortable with; and enter the price into the BTC premium box. There is also no need to think about IV orders as the order will be filled immediately.
In comparison, you need to think carefully before filling a maker order.
This is because once it is a maker order, the method of posting an order based on the absolute value of the premium is prone to flaws.
Again, let’s use the contract in Screenshot 3 for example. A buy order posted at 0.0995 BTC will not be filled at the moment because the sell order is 0.1015 BTC.
If there is no ask and the price of the underlying asset starts to move significantly, the following two scenarios will occur:
- The price of the underlying asset moves up significantly, causing the premium of the entire BTC-26MAR21–60000-C to increase, in which case it is more impossible for the price of 0.0995 BTC to buy options.
- The price of the underlying asset plunges, causing the prices of the entire order book, including the mark price, to drop. As the market fluctuates, there will be few pending orders in the market. The price of 0.0995 will finally buy an option, but by that time the mark price would have already reduced to 0.0960, resulting in a slippage of 0.0035. In this case, you might as well just fill the counterparty’s order earlier, with a slippage of only 0.0014 BTC (best ask 0.1015 minus the mark price 0.1001).
Therefore, a good solution is to post IV orders.
The specific steps are as follows.
Step 1: First look at the mark price in the top right corner, which shows 0.1001 BTC. I want to trade at a price approximately 0.0005 away from the current mark price. In other words, enter 0.0995 in the BTC premium order box. You will find that the number in the bottom IV box will also be adjusted to the corresponding value.
Step 2: At this point, click on IV inside the BTC USD IV across the top again to switch the quote mode to IV order.
Step 3: Enter the “Quantity” (Red Figure 3 in Screenshot 3). Then click the green button to buy.
In this way the quotes are adjusted in real time to the latest underlying price.
- If the market is quiet and IV falls, IV orders will move further up inside the order queue, resulting in trades with low or no slippage.
- In case of market swings and the IV rises, IV orders will move to the back of the order queue.
In this case, the Greeks.live website has a feature called “Jump Queue” or “Jump Queue at One Click” (see Screenshot 4), which is located at the top of the page in the table of Options Positions and Pending Orders. Click on the Pending Orders page, and you will be able to jump the queen for each independent order or for all orders.
If you click this button to use this feature, then all buy orders will move to the top of the queue to become best bids; and all sell orders will move to the top of the queue to become best asks. This saves the user the trouble of repeatedly comparing the quotes in the order book.
Mr. Xian has written an article about the “Jump Queue at One Click” feature upon our request.
The legends/screenshots shown in this article are generated from the order page on www.greeks.live/web/. You are welcome to use the page more. Your encouragement is our motivation. We will follow up with more practical guide articles on a regular basis.
February 19, 2021