All options on Deribit up to this point have been cash settled. This included the inverse (coin settled) and linear (USDC settled) options. Moving forward, Deribit will be changing how the settlement process for options works, such that they are first physically settled into a futures contract, which itself then settles into cash upon expiration.

The new delivery process will first be rolled out on linear (USDC settled) options, and then later on inverse (coin settled) options.

In terms of the profit/loss of option positions, and what is paid or received on expiry, there is no difference between the two methods. Some traders will benefit from lower settlement fees on the futures though.

So the net financial result of the change will be a trader will either see no change, or they will be slightly better off by saving on delivery fees.

What is changing?

  • There will be many more futures contracts, as every option expiry will now require a corresponding future to settle into. These new futures will be listed at the same time as the first option contracts for each expiry.
  • At the moment of expiry, there will be an extra step in the transaction log for any options that expire in the money (ITM). There will be an entry that first physically settles the ITM option into the relevant futures contract, and then a delivery entry for the future.
  • Any positions on the relevant future will net off just before expiry, which can result in lower delivery fees for the future. If there is any offsetting, the total delivery fees will be lower with the new delivery process. If there is no offsetting, the total delivery fees will be the same as before.

What is not changing?

  • The settlement currency for all instruments remains the same.
  • The futures settle on the exact same 30 minute TWAP of the index leading into expiry, so the profit/loss of an option position will be exactly the same.
  • A delivery fee is still paid on an expiring ITM option, prior to any position netting on the future.
  • Although the options will now physically settle into futures, these futures will then settle into cash shortly thereafter in the same way as the options used to, so from the trader’s perspective the options can still be thought of as cash settled.

Delivery fees explained

The usual delivery fee will still apply to an option expiring ITM at the moment it is physically settled into futures. A futures position generated by the physical settlement of the ITM option will not pay an additional delivery fee though. So there is no double payment of delivery fees for the same position.

The futures position generated by the physical settlement of an option can however offset any existing position on the future before the delivery fee for the future is calculated. So if the physical settlement of the option results in a smaller futures position size, this will result in a smaller delivery fee being paid on the future. If the physical settlement of the option results in the futures position flipping to the opposite direction, there will be no delivery fee to pay for the future.

What will happen in the transaction log?

When an option expires OTM (out of the money), the value in the Type column will be changing to “expiry”. As there is nothing to settle into futures when an option expires OTM, this will remain the only entry in the transaction log.

When an option expires ITM, there is currently a single delivery entry in the transaction log. This entry (cash) settles any intrinsic value of the option into the cash balance.

With the new process, there will be an addition entry, resulting in:

  1. An entry to physically settle the option into the futures contract, with an entry price of the strike price of the option.
  2. The delivery entry for the futures contract. This entry (cash) settles any profit from the futures into the cash balance.

The currency that any payments are made in, as well as the total profit after delivery, will be the same with both methods.

Examples

Example 1

A trader is long one BTC_USDC call option with a strike price of $100,000. At expiry the expiration price is $125,000. How is this handled in the transaction log?

Old method:

  • A delivery entry for the option will settle the 25,000 USDC intrinsic value of the option into the cash balance.

New method:

  • First, an entry will physically settle the option into a futures contract. In this example, one BTC worth of BTC_USDC futures will be purchased with an entry price of $100,000 (the strike price of the call option).
  • Next, a delivery entry for the futures contract will settle the 25,000 USDC profit from the futures contract into the cash balance.

In both instances, the cash balance increases by 25,000 USDC. As there was no pre-existing futures position to offset with, the total delivery fees paid is also the same.

Example 2

A trader is long one BTC_USDC put option with a strike price of $80,000, and they are also holding a long BTC_USDC futures position on the expiring future with an entry price of $80,000, and a position size of 0.5 BTC. At expiry the expiration price is $70,000.

Old method:

  • A delivery entry for the option will settle the 10,000 USDC intrinsic value of the option into the cash balance.
  • A delivery entry for the future will settle the 5,000 USDC loss into the cash balance.

New method:

  • First, an entry will physically settle the option into the futures contract. In this example, one BTC worth of BTC_USDC futures will be sold with an entry price of $80,000 (the strike price). This will net off against the existing 0.5 BTC long position in the BTC_USDC future, resulting in a short position with a size of just 0.5 BTC.
  • Next, a delivery entry for the futures contract will settle the 5,000 USDC profit from the futures contract into the cash balance.

In both instances, the cash balance increases by 5,000 USDC. The difference here though is that with the old method, a delivery fee would be paid on a total position size of 1.5 BTC, however with the new method, a delivery fee will only be paid on the option delivery with a position size of 1 BTC. The existing futures position was reduced by the option delivery and even flipped in the opposite direction, so there is no delivery fee for the future. This means the total delivery fee will be a third less than it would have been previously.

When/how will this change be introduced?

The new delivery process will first be rolled out on linear (USDC settled) options, and then later on inverse (coin settled) options. The change will be live on any linear options that expire from early April and onwards.

Summary

Deribit options will be moving from cash settled options to future settled options. The futures remain cash settled. There is no effect on profit/loss amounts or settlement currencies. Delivery fees will only be paid on the net remaining futures position after options settlement is taken into account, so traders will either pay lower delivery fees, or pay the same delivery fees as previously.

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