FAQ

What is Passport option?

A passport option gives the holder a zero-strike call option on the value of a trading account.

Example of a passport option

Today is 19th October 2022. The Bitcoin price is at USD 19’000. The Ethereum price is at USD 1’300.

Bob buys a passport option to trade BTC and ETH till year-end.

Bob pays USD 120’000 to have a right to open positions of up to USD 1’000’000 notional (notional is calculated at the market price at the moment of the trade) till 20th December 2022. This is the maximum he could lose.

Bob doesn’t pay any commissions for trades, and he doesn’t need any additional collateral to secure positions under the passport option. The number of trades is unlimited (he can trade as often as he needs).

Bob goes long using all available buying power to buy perpetual futures on BTC:
Buy 52.63 BTC (1’000’000 / 19’000) at USD 19’000.

26th October 2022. The Bitcoin price is at USD 17’000. Ethereum price is at USD 1’100.
Bob decides to switch positions from BTC to ETH (sell BTC back and buy ETH) using all available buying power:
Sell 52.63 BTC at 17’000
Buy 909.09 ETH (1’000’000 / 1’100) at 1’100


16th November 2022. The Bitcoin price is at USD 24’500. Ethereum price is USD 1’950.
Bob decides to close the position in ETH (sell ETH back) and turns short using half of his available buying power:
Sell 909.09 ETH at 1’950
Sell 256.41 ETH (500’000 / 1’950) at 1’950

7th December 2022. The Bitcoin price is at USD 19’000. Ethereum price is USD 1’300
Bob decides to open a short position in BTC (sell BTC) using the rest of his available buying power (USD 500’000):
Sell 26.31 BTC (500’000 / 19’000) at 19’000

30th December 2022. The Bitcoin price is at USD 11’200. Ethereum price is USD 700
Bob unwinds all positions before the expiry:
Buy 26.31 BTC at 11’200
Buy 256.41 ETH at 700

His profit is USD 99’958 (BTC) + USD 1’093’239 (ETH) = USD 1’193’197

Given premium paid his net PnL is USD 1’193’197 — USD 120’000 = USD 1’073’197




What is Plain vanilla option?

A European call option gives the holder the right, not the obligation, to buy the underlying asset at a certain date (known as expiry) for a certain price (known as a strike price). A European put option thus gives the holder the right to sell the underlying asset at expiry for a strike price. 

Example of a call option

Today is 19th October 2022. The Bitcoin price is at USD 19’000.

Bob thinks that within a month, it will break out from the bear flag and jumps to the USD 23’000-USD 25’000 area.

Weary of the downside risks, he doesn’t want to be long a Bitcoin perpetual future with leverage and instead chooses to play his view by buying a 25th November expiry 2022 at-the-money call option with the strike at USD 19’000.

He buys 10 BTC USD 19’000 25.11.2022 call options for USD 1’690 each, thus paying a total premium of USD 16’900. This is the maximum he could lose (as opposed to buying futures where the potential loss is USD 190’000).

Bob proves to be right, and Bitcoin does indeed break out to the upside, and the price at expiry (25.11.2022) is USD 23’100.

Therefore, his profit on each contract at expiry is USD (23’100 — 19’000) = USD 4’100. The overall position given x 10 = USD 41’000.

Given the premium paid, his net PnL is USD 41’000 — USD 16’900 = USD 24’100.

Example of a put option

Today is 19th October 2022. The Bitcoin price is at USD 19’000.

Bob thinks the crypto winter has just started, and the Bitcoin price will go down below USD 15’000 in 3 months.

He is concerned about a potential margin call and wants to avoid going short via bitcoin perpetual leveraged futures. Aware of the upside risk, he instead prefers to buy a put option striking at USD 17’000 30th December 2022 expiry (slightly out-of-the-money to get more leverage).

He buys 10 BTC USD 17’000 30.12.2022 put options for USD 1’050 each, thus paying the total premium of USD 10’500. This is the maximum he could lose (as opposed to buying futures where the potential loss is unlimited).

Bob proves to be right. The market faces a strong selloff, and the price at expiry (30.12.2022) is at USD 11’200.

His profit on each contract at expiry is, therefore USD (17’000 — 11’200) = USD 5’800. And the overall position given x 10 = USD 58’000.

Given premium paid his net PnL is USD 58’000 — USD 10’500 = USD 47’500.

What is European digital option?

A digital option is a type of option that provides a fixed payout if the underlying asset moves beyond the strike price (higher for call option and lower for put options).

Example of a digital call option

Today is 19th October 2022. The Bitcoin price is at USD 19’000.

Bob believes Bitcoin will be above the current level within a month, but he doesn’t expect strong movements.

He buys a 25.11.2022 digital call option, strike USD 19’000, notional USD 20’000 for USD 10’200. This is the maximum he could lose. Bob will receive full notional of option if the Bitcoin price is above the strike on the expiry date.

Bob proves to be right, and the Bitcoin price at expiry (25.11.2022) is at USD 23’100 (above USD 19’000).

His profit is, therefore, USD 20’000.

Given premium paid his net PnL is USD 20’000 — USD 10’200 = USD 9’800.

Example of a digital put option

Today is 19th October 2022. The Bitcoin price is at USD 19’000.

Bob believes in a very pessimistic scenario till year end in which Bitcoin can lose more than 30% from current levels, and he is looking for a leveraged product to monetize his view.

He buys a 30.12.2022 digital put option, strike USD 12’000, notional USD 100’000 for USD 8’900. This is the maximum he could lose. Bob will receive the full notional of the option if the Bitcoin price is below the strike on the expiry date.

Bob proves to be right, and the Bitcoin price at expiry (30.12.2022) is at USD 11’200 (below USD 12’000).

His profit is, therefore, USD 100’000.

Given premium paid his net PnL is USD 100’000 — USD 8’900 = USD 91’100.

What is Barrier option?

Barrier options are options where the payoff depends on whether the underlying asset’s price reaches a certain level during a certain period of time. There are two types of barrier options: knock-out options and knock-in options. A knock-out option ceases to exist when the underlying asset price reaches a certain barrier; a knock-in option comes into existence only when the underlying asset price reaches a barrier.

Example of a barrier knock-in call

Today is 19th October 2022.
Bitcoin price is USD 19’000.
 
Bob thinks Bitcoin is ready to jump to new levels, and he is looking for the cheapest instrument with unlimited upside without the risk of a margin call.
 
He buys 10 BTCUSD 19’000 call knocking-in at 22’000 25.11.2022 for USD 450 each, thus paying a total premium of USD 4’500. This is the maximum he could lose. Bob will receive a call option payoff only if the price is above the barrier on the expiry date.
 
Bob proved to be right, and the Bitcoin went up a lot from the entry point. The Bitcoin passed the barrier (22’000), and the price at expiry (25.11.2022) is USD 23’100.
 
His profit on each contract at expiry is, therefore, USD (23’100 — 19’000) = USD 4’100 (difference between strikes). And the overall position has given x 10 = USD 41’000.
 
Given the premium paid, his net PnL is USD 41’000 — USD 4’500 = USD 36’500
 

Example of a barrier knock-in put

Today is 19th October 2022.
Bitcoin price is USD 19’000.
 
Bob is very negative on the market in the next three months, and he is
looking for the cheapest hedge without upside risk.
 
He buys 10 BTCUSD 19’000 put knocking-in at 16’000 30.12.2022 for USD 620 each, thus paying a total premium of USD 6’200. This is the maximum he could lose. Bob will receive a put option payoff only if the price is below the barrier on the expiry date.
 
Bob proves to be right, and the price at expiry (30.12.2022) is USD 11’200 (below the barrier).
 
Therefore, his profit on each contract at expiry is USD (19’000 — 11’200) = USD 7’800. And the overall position has given x 10 = USD 78’000.
 
Given the premium paid, his net PnL is USD 78’000 — USD 6’200 = USD 71’800