Margin Optimisation By Unwinding Low-Delta Short Options

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Published On

February 2, 2022

The beginning of 2022 has seen a material move lower in BTC and ETH (~30% lower since 1-Jan at the time of writing). For option traders, large market moves like we have seen over the last few weeks would often result in many option positions which have theoretically very little value and can effectively be ignored. However, given most exchanges calculate margin requirements based on a spot and volatility shock, low-delta options which traders are short can excessively tie up margin which could be more effectively used elsewhere. In our experience, unwinding these short options either as a standalone or in combination with other options might be an effective way to optimise your portfolio’s margin.

The Problem

Suppose you shorted top-side volatility at the beginning of 2022 (a good trade at the time) – a short position in a 25-Mar-2022 65k BTC Call with significant vega and decay. Currently given the move in spot, that option is marked at 0.0050 BTC and is priced as a 5-delta option. While it is very likely to expire worthless which is why most traders leave it alone, it is still consuming margin (Deribit for example will price this under standard portfolio margin with a 15% spot shock) - the exact amount of margin consumed will depend on your portfolio. The margin saved on unwinding this position could easily be redeployed into other opportunities - including being short closer strikes in smaller notionals.

Potential Solutions

Below we present three ways to optimize your portfolio margin for the example position you have above (you shorted topside volatility on BTC at the beginning of the year – 65k BTC Call, 25-Mar-22 Expiry. That has rolled down to a 5-delta option and is now marked at 0.50% BTC)

Solution 1

Unwind/buy back the low delta calls by paying premium

BUY 25-Mar-2022 65k BTC Call

Why?

This is a simple solution if you get a price on this - pay the premium to release your margin which you can use elsewhere.
This runs into one issue in that, market makers are generally reluctant to quote outright naked low delta calls or puts – however in combination with another strike which you are long it might net be an attractive prospect for a market maker or another institution with the opposite margin exposure.

Solution 2

Unwind the low delta calls by selling a smaller notional of closer delta calls

SELL 1x 50k 25-Mar-22 BTC Call and BUY 4x 65k 25-Mar-22 BTC Call - zero cost

Why?

Reduces margin given your notional of short is much lower and if market stays stable, you make the same decay.

Solution 3

Unwind the low delta calls by selling other options which you may have elsewhere in your portfolio which you might not have any use for.
Suppose in the middle of the large market move, in addition to being short topside you bought tail options on BTC puts as a hedge for a meltdown – 20k BTC Put, 25-Mar-22 Expiry. This has also rolled down to a 5-delta option and you are no longer scared of the potential large downside in BTC.

SELL 1x 20k 25-Mar-22 BTC Put and BUY 1x 65k 25-Mar-22 BTC Call - zero cost

Why?

The option you are long may not be giving you any margin benefit – while the option you are short is costing you significant amounts in margin. This might be the opposite side to another counterparty so it suits both sides.

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