Welcome to this introduction to the Deribit Option Discovery Tool. This tool allows you to select a currency, which direction you think the price of that currency will move, and what timeframe you expect it to move within. It will then recommend 3 different options that will allow you to express your prediction as a trade.
I’ll be working with the dark mode version here, but for those that prefer a light mode, there is a simple toggle in the top right. Clicking this will switch between the two colour modes.
Selecting the currency
Once you’ve selected your preferred look, it’s time to select the currency. Currently available are BTC and ETH. The current index price is also shown for each.
Click the one you want to trade, and the next settings below will automatically update. Today we’ll use BTC as an example.
Selecting the price direction
Next up is selecting the direction you think the price will move in. This is done by selecting either the up arrow for an increase in price, or the down arrow for a decrease in price. Selecting the up arrow will suggest call options to buy, and selecting the down arrow will suggest put options to buy. There is also an advanced section that deals with selling options which we’ll come onto shortly.
For this example let’s say we expect the price of bitcoin to increase, so we’ll select the up arrow.
Selecting the timeframe
The next thing to select, is the timeframe we expect this price increase to happen in. In other words, the expiry date of the options we’ll be looking at. Any price movement you’re looking to take advantage of, will have to happen before this date.
Let’s say we’re expecting this price increase to happen before christmas so we’d like to look at the options for the 25th December 2020. To do that we just click here:
The options shown
Now we’ve selected all the parameters we want, the option discovery tool will now show us a selection of options that are relevant to the view we have.
Here we’ve told it that we think that the price of bitcoin is going to increase by the 25th December 2020, so it’s showing us three call options that could benefit from that happening.
A summary for all three is shown, with the strike price on the left, and the current option premium on the right. You will also notice the three coloured indicators next to the strike price. These give a brief idea of the cost, probability and return of each option relative to the others.
The cost refers to the price you need to pay for the option compared to the other suggestions.
The probability refers to the relative probability that the option will expire in the money. As all the options suggested are out of the money, even the ‘high’ probability will represent something in the region of a 40-50% implied probability of expiring in the money.
And the return refers to the relative return compared to the cost, if the option were to indeed finish a certain amount in the money.
As well as this quick summary view, we can also click to expand the extra details for each option shown. Let’s look at the details for the first option suggestion.
The strike price of $21,000 is shown prominently in the top left. With a description underneath.
The breakeven price at expiry is displayed next. $22,175.29 in this case. This is the price at which the option position will have made exactly zero bitcoin at expiry. For long call options, any price over this at expiry will result in a profit, and any price below this at expiry will result in a loss.
The percentage above the current index price that must be reached to get to this breakeven price at expiry is also given.
The maximum profit and loss are both displayed in BTC terms, and also in brackets in USD terms. We won’t dive into how to calculate these figures in this tutorial, but there are several lessons on the Deribit education blog that cover this if you want to gain a deeper understanding.
There is one on call options here:
And one on put options here:
The profit/loss charts
To the right of the statistics the profit and loss chart of the option is shown. This is the profit and loss at expiry. You are of course welcome to close the position whenever you like but the amount may differ to the chart if done before the option expires.
The x axis shows the index price at expiry, and the strike price of the option is indicated by the dotted line. The profit and loss in bitcoin is shown here in green, with the scale on the left. The profit and loss in dollars is shown here in blue, with the scale on the right. The balance and any profit or loss is of course paid in bitcoin, so the bitcoin line is showing you what you will actually pay or receive in your Deribit account. The dollar amount is there for illustration, and shows the amount it would be if everything was paid in dollars instead of bitcoin.
If you hover over the chart it will show the values for each line at that point.
Clicking ‘CONTINUE’ in the bottom right will take you to the option chain on the Deribit website.
The advanced suggestions
Underneath the 3 call option suggestions, you can see we have a toggle button to show advanced suggestions.
This toggles on recommendations that involve selling options. The advanced suggestions use the same parameters we gave the tool at the top. We told the tool that we expect the price to increase, so if we toggle the advanced settings on now, it will suggest some put options to sell.
The reason this is considered advanced and hidden by default, is that when selling options, your risk is undefined. This means you can lose far more than you collect in premium if price moves against you significantly. For this reason you should make sure you are fully aware of the risks before attempting to sell any options. The naked selling of options is not recommended for option beginners.
As you can see, the same statistics and profit and loss chart are shown. This time, because it’s a put option, the breakeven price is of course lower than the current price. So the price movement needed to reach the break even price is shown as a negative. For short put options, any price over this at expiry will result in a profit, and any price below this at expiry will result in a loss.
This tool can help give you some quick suggestions based on your market outlook that you enter at the top. Due to the tool’s simplicity, it can be easier to use to get trade ideas compared to trying to digest the entire option chain. As such it is particularly useful for newer option traders.