Shortly after the index is up and running, we will introduce options trading on the Rhea platform. If you are unfamiliar with options as a financial derivative, please read Options guide from the Documentation tab on our website before continuing.
Trading options on the Rhea Crypto20
This section presents all aspects of options trading on the Rhea platform.
Why trade options on the Rhea Crypto20?
There are two key reasons why investors would trade options on the Rhea Crypto20.
- Speculate – investors can take positions on the Rhea Crypto20 index via our options trading platform, which will reflect their view of the market’s development over a fixed time period.
- Hedge – investors, which already have one or several positions in some cryptocurrencies can, buy/sell options on the Rhea Crypto20 index to diversify their portfolio.
We will now go over some specifics that the Rhea platform will have. Some of them may appear restraining, but they are crucial in assuring a sustainable start of options trading.
|European options only||By starting with the simplest option style there is, we will make sure that the Rhea platform is fully operational, liquid, fair and arbitrage-free. When the market becomes liquid enough to sustain itself, we will introduce other options styles. At that point in time, we may entirely replace European with American options.|
|Cash-settled options||There will be no transfer of ownership; users will speculate on the index’s price action and find counterparties with opposing views. As soon as a trade is made, the platform checks if the two parties have enough Rhea in their accounts and then blocks the given amount for the duration of the trading options. The “winner” from the trade will receive his Rhea tokens immediately.|
|Pre-set maturities and
|The different options available on the Rhea Crypto20 index will have a wide range of maturities and strike prices available, pre-set by us. There are two reasons we are doing this: firstly, the market will be very illiquid in the beginning if we let participants fully customize the options they want to buy/sell. Secondly, this will ensure the market is set up fairly and is arbitrage-free|
|Users will be able to select the amount they would like to invest in pre-set ranges. If there is full freedom, it would be harder to find a counterparty. Note that the amount will be in Rhea; however, depending on the tier reached on the milestone map, the platform will have instant conversion features, which will allow users to enter the sum in a fiat currency, while investing with Rhea (or also in BTC/ETH). This will eliminate annoying calculations and make the process more transparent.|
|All submitted orders will be quoted on the Rhea platform for 15 days. If no counterparty has been found, the order expires. Immediately after this, users are free to submit new orders.|
|Market-making by us||The intent of Rhea is to create a marketplace, where participants directly trade with each other. For this reason, we will take positions only if there is low liquidity in the market. The first months after options trading is available on the Rhea platform, there is a high chance that some market participants will not be able to find a counterparty, which is where we come in. The 10% liquidity reserve that we mentioned in the ICO section will be kept specifically to take positions with other platform users in case they are not executed. As more participants join Rhea, our intervention will be required less often.|
|Market-making rules||There are two rules, which will govern when we become a counterparty to an order:
1. 80% to order expiration – if an order has not found a counterparty for 12 days (80% ∗ 15 𝑑𝑎𝑦𝑠), the order will become eligible for our liquidity provision system.
2. Maximum order size – our total liquidity provision reserve will vary depending on the success of the ICO. The latter will define the maximum order size that we can become counterparty to
|3 forms of fee rebates||Users will be able to obtain fee rebates and reduce the transaction costs they pay. There are three ways to obtain a rebate.|
We will use several pricing feeds, thus making sure that prices are always available. Users will be able to see their P&L live, along with various statistics, graphs etc., depending on the milestone.
The Rhea platform will provide full transparency on three activities. The first one is the full transaction history for all platform users. The database will record all transaction for every anonymous account and will be available on the platform. The second one is transaction history for the Rhea team with regard to liquidity provision. Users will be able to see which trades we have executed. The third one is transaction fees – our source of revenue will be updated live, so that users can estimate the next dividend
The structure is very simple: 0.95% transaction fee per trade on the cash flows at contract initiation and expiration. As previously mentioned, Rhea will share these fees with token holders on a quarterly basis, which will be equivalent to an interim dividend for equity shares. The example below shows how the fees will be calculated on a regular call option that is at-the-money at contract initiation and is in-the-money at expiration:
Person A buys a 6-month 100-strike Rhea call option from person B at a price of 11.25 Rhea. Upon execution, both parties are charged 0.95%, equal to 0.62 Rhea in total transaction costs, or 0.11246 for A and 0.11246 for B. Both A and B get 100 Rhea blocked in their account, until the option expires. The option is held until maturity by both parties and, 6 months later, it is in-the-money – underlying is
at 120 and A receives 20 Rhea, B gets 0. Both are subject to a 0.95% transaction fee and the cashflows look like this (figures are in Rhea):
|Premium||-11.2463 R||–||-11.2463 R|
|Transaction fee||-0.1068 R||-0.19 R||0.2968 R|
|P&L||–||20 R||20 R|
|Totals||-11.3531 R||19.81 R||8.4375 R|
|Premium||11. 2463 R||–||11.2463 R|
|Transaction fee||-0.1068 R||-0.19 R||0.2968 R|
|P&L||–||-20 R||-20 R|
|Totals||-11.1395 R||-20.19 R||-9.0505 R|
At contract initiation, the transaction fee is taken from the call option price; at expiration on the P&L. If, contrary to the example, an option is not exercised, there will be no cash-flows at expiration, hence no transaction fee.
The fee will be split between the Rhea team and token holders (depending on the tier reached on the Milestone Map). Therefore, a more successful ICO will result in even lower effective commissions, as transaction costs will be returned to investors once per quarter in the form of a dividend. For comparison, in tier II the dividend-adjusted fee will be 0.76% (0.95%∗ (100% − 20%)), whereas in tier VII – 0.57% (0.95% ∗ (100% − 40%)). In essence, there is a negative correlation between fees and tier reached, as well as between fees and traded volume. The more liquid the Rhea platform becomes, the higher the nominal return for Rhea token holders.
- Maker-taker rebates – Rhea’s vision is for platform users to trade between themselves, however, it is expected that when trading begins, there will be insufficient activity at first. As previously mentioned, the Rhea team will use part of the proceeds for liquidity provision, which should facilitate trading. In addition, users who become counterparties to long quoted orders (usually deep in-the-money or out-of-the-money options) will receive a transaction fee rebate equal to 50%. By long quoted we mean a trade that has not found a counterparty for several days. To better understand the implications, here is a quick example:
Person A thinks the Crypto20 will almost double in 6 months, so he quotes to buy for 1.41 R a 6-month 180 R-strike call option, given that the Crypto20 is at 120 R right now (the option is out-of-the-money). Person B calculates a very low probability of the Crypto20 surpassing 180 R, so he decides to become the counterparty. B takes on the risk of a short call, but earns the premium and pays 50% less transaction fees.
Example 3 above showed how Rhea users can increase their profits by becoming the counterparty of an out-of-the-money option. Similarly, deep in-the-money options will also tend to be illiquid because they expire in favor of the buyer with a very high probability. The Rhea team will serve as counterparty to as many options as possible, however we will not be able to cover all quotes. Market makers will be rewarded for complementing our liquidity provision. The specific conditions, which define when a trade qualifies for maker-taker rebates will be announced prior to the platform launch. The quotes eligible for rebates will be conveniently visible to users as they browse through the platform.
High activity rebate
- More active users will reward with an additional rebate. This will be dependent on transaction volume, i.e. if their turnover with respect to total turnover on the platform passes a certain threshold, as shown in the formula below: 𝑇ℎ𝑟𝑒𝑠ℎ𝑜𝑙𝑑 < (𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑋)/(𝑇𝑜𝑡𝑎𝑙 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟), where Turnover X is the total amount of Rhea that user X has traded in a 3-month period (measured in the sum of cash-flows) and Total Turnover is the total amount of Rhea traded in the same period.
If the ratio is above the Threshold, an investor would benefit from the high activity rebate, equivalent to a higher dividend yield. The threshold will be determined post-ICO as the rebate is sensitive to the former’s success. Platform users will have at their disposal a full account history and statistics on their trades. The total turnover for a 3-month period will be displayed, as well as how close the account is to receiving a high activity rebate.
- 1-year 0% fee for ICO contributions above 2,500 ETH – large individual contributions will be rewarded with no transaction fees for the first year after the platform becomes operational. The wallet address of any contributions above 2,500 ETH will be recorded and use as a basis for 0% fee identification once the platform is operational.
As trading on the platform reaches a critical mass, we will serve as counterparty less often. Once this happens, our team will be ready to introduce additional features. Here is a short list in chronological order of what we are going to focus on, once the platform is fully
- Switch to American options – will occur once we have made sure that the platform is balanced and fully functional. As American options are always at least as attractive as European ones, this substitution will be beneficial to all users.
- Give users a lot more freedom with option features – as liquidity on the platform increases, finding a counterparty will be easier, so more choice on strike prices and maturities will become available.
- Create other indices – the Rhea Crypto20 is only the start; we will work towards the development of specialized indices focused on other aspects of the market such as volatility, small-cap, mid-cap, new tokens etc. The calculation methodologies not necessarily capitalization-weighted.
- Introduce more complex option styles – Bermuda, Asian and Barrier options are three of the styles that we aim to bring out.