# Understanding Thalex Contract Specifications: Perpetuals, Futures, Rolls, and Options

## Explore Thalex's contract specifications: from perpetuals and their funding mechanism to our options and innovative future roll instruments. Delve into the accurate index methodology and the comprehensive risk-based margining system.

In this blog post, we will delve into Thalex's contract specifications, placing emphasis on perpetuals, futures, rolls, and options. Throughout this post, we will go over the distinctive features of these contract specifications, including their funding mechanisms, mark prices, and other essential elements.**Abbreviations:**

BTC | Bitcoin |

ETH | Ethereum |

USDt | Tether |

USDC | USD Coin |

**Perpetuals:**

The design objective for our perpetuals was to make our funding rate more transparent and predictable. This facilitates price formation across the term structure. We should expect that futures basis reflects the expected cost of carry of a perpetual if held for the time to expiration. Therefore, if funding rates are non-linear and jumpy, the futures and future rolls are harder to price.

**Funding Rate Mechanism:**

- Thalex computes the funding rate almost instantaneously, and traders consistently exchange funding payments, either adding to or subtracting from their unsettled PNL.
- Although some cryptocurrency derivatives exchanges apply an 8-hour funding rate, Thalex utilizes a 24-hour basis for its funding rate. This decision results in a naturally reduced absolute funding rate for an equivalent premium. Additionally, Thalex streamlines the funding computation by eliminating the necessity for clamps or dampers.
- The calculation relies on a 30-second exponential moving average of the Premium and Index to determine the funding rate.

**Funding is implemented as an integral over time:**

**Perpetuals Contract Specification:**

Underlying | Bitcoin | Ethereum |

Ticker | BTC-PERPETUAL | ETH-PERPETUAL |

Index | Thalex BTCUSD | Thalex ETHUSD |

Contract Size | 1 BTC valued at 1 USD per Index Point | 1 ETH valued at 1 USD per Index Point |

Quotation | USD | USD |

Minimum Order Size | 0.001 BTC | 0.01 ETH |

Tick Size | 1 USD | 0.1 USD |

Collateral | BTC, ETH, USDt, USDC | BTC, ETH, USDt, USDC |

Daily Settlement | At 08:00 UTC | At 08:00 UTC |

Daily Settlement Procedure | Futures-style settlement at the Mark Price | Futures-style settlement at the Mark Price |

**Mark Price:**

The Mark Price, an essential metric, is a composite of the Index and a 30-second exponential moving average of the Premium. It plays a pivotal role in tracking the true value of the contract and undergoes updates approximately every second, enabling precise and real-time decision-making.

**Options:**

Thalex offers European-style options, meaning they can only be exercised upon reaching expiration. Furthermore, options adhere to a futures-style daily settlement mechanism based on the daily mark price. This streamlined process incorporates the option's premium into unsettled PNL, simplifying the overall trading experience.

**Mark Price Calculation for Options:**

- The calculation leverages the Black-Scholes model with a zero risk-free interest rate, pertinent futures mark price, and mark volatility as input parameters.

**Examples of option tickers (time in UTC):**

- BTC–14OCT23–55000–C: Bitcoin call with $55K strike expiring on 14 October 2023 at 08:00.
- BTC–14OCT23–55000–P: Bitcoin put with $55K strike expiring on 14 October 2023 at 08:00.
- ETH–25NOV23–4000–P: Ethereum put with $4K strike expiring on 25 November 2023 at 08:00.

**Future Rolls:**

Thalex introduces roll instruments, empowering traders to concurrently engage in the buying and selling of a perpetual and a future, or two futures with the same underlying asset. This innovative feature provides traders with a high degree of flexibility and strategic options.

**Order Execution Example:**

A buy order in a roll instrument is an order to buy the longer maturity contract and sell the earlier maturity.

- A participant buys one roll instrument BTC-28JAN24-PERPETUAL. The resulting position change is +1 BTC-28JAN24 and -1 BTC-PERPETUAL.
- A participant sells one roll instrument ETH-25FEB24-28JAN24. The resulting position change is -1 ETH-25FEB24 and +1 ETH-28JAN24.

A roll order fill results in two trades. The trade prices of the legs are given suitable (arbitrary) reference prices.

For instance, a limit buy order of size 0.5 in BTC-28JAN24-PERPETUAL at $45 may lead to the following trade history when filled:

- 0.5 BTC-28JAN24 bought at $50,945, and 0.5 BTC-PERPETUAL sold at $50,900.

**Index Methodology:**

Thalex's index calculation follows a meticulous four-step process, drawing from order book data sourced from various exchanges. This approach ensures a dependable and accurate representation of the underlying asset.**The calculation has four steps:**

- Obtain a list of prices from constituent exchanges. The price of an exchange is calculated as the average of best bid and ask in the order book.
- Calculate the median of available prices.
- Cap each price to deviate at most 0.5% from the median.
- Calculate the simple average of capped values to obtain the Index.

**Expiration:**

On the day of expiration, the Exchange Delivery Settlement Price ('EDSP') is calculated as the time-weighted average of the Index between 07:30 UTC and 08:00 UTC.**During the expiration window, Thalex broadcasts:**

- Current Expiration Average: time-weighted average of the Index since the start of the expiration window, accompanied by a timestamp to track expiration progress.
- Expected EDSP: average of the Current Expiration Average and the Index, weighted by time elapsed and time remaining relative to the expiration window.

An expiring future will have its Mark Price calculated based on the Expected EDSP.

Options traded on Thalex have a futures-style daily settlement at the mark price. This means that if, for example, you buy a BTC call option, the premium of the option is not immediately deducted from your asset balance. Instead, the premium is reflected in your unsettled PNL.

Important to note: As unsettled PNL is settled in the settlement coin (USDt), you are required to maintain sufficient USDt in your account at all times to avoid negative USDt balances after settlement.

**Settlement Procedure:**

USDt is the Settlement Coin. Thalex, in its sole discretion, can select a different Settlement Coin. Unsettled P&L, either realized or unrealized, is not available for withdrawal. Settlement credits / debits the Settlement Coin balance with the Unsettled P&L. This process uses a market-based USDt/USD rate to convert P&L, which is USD-denominated, into a USDt amount.

Participants should ensure they have sufficient balance in the Settlement Coin.

**Portfolio Margin and Asset Balance:**

Portfolio margin, a risk-based margining system, considers the comprehensive risk profile of your entire portfolio. Thalex accepts BTC, ETH, USDt, and USDC as collateral assets, with the asset balance representing the total value of your collateral translated into USD. Notably, USDt and USDC are translated without any applied discounts, while BTC and ETH are translated at their respective index values.

The aggregate of your asset balance and unsettled profit and loss (P&L) constitutes the margin balance, serving as the basis for determining your capacity to maintain or adjust positions.

**Understanding Margin Requirements:**

Thalex employs a meticulous methodology to compute margin requirements for each underlying asset. The total initial margin requirement (IMR) is the summation of IMR for each underlying asset. The maintenance margin requirement (MMR) is set at 70% of the initial margin requirement.

The IMR for an underlying asset encompasses maximum loss coverage, accounting for potential loss scenarios rooted in price and volatility fluctuations. Diverse scenarios are simulated to ascertain comprehensive risk mitigation.

**Roll and Option Contingencies:**

Thalex systematically accommodates price sensitivity and varying maturities through roll contingencies, which entail adding margin for positions with offsetting delta. Option contingencies, conversely, involve the addition of margin for each short strike position.

**Open Order Limits and Liquidation Process:**

To facilitate efficient trading and risk management, Thalex implements open order limits that are contingent upon the type of instrument being traded. These limits contribute to maintaining a structured and manageable trading environment. In the event of a maintenance margin breach, Thalex initiates a liquidation process to restore the margin balance to the initial margin requirement, thereby safeguarding your investments and preserving portfolio stability.

**Know Your Exceptions:**

While specific open order limits are in place, exceptions may arise on a case-by-case basis, depending on individual circumstances and trading strategies. Thalex exercises flexibility in such scenarios and encourages traders with unique needs to reach out to our support team for potential limit adjustments and tailored assistance.

Full documentation on Thalex's Contract Specifications can be found here.