What are Binance Options?
Binance Options are a simplified version of traditional options, it is designed to enhance a user’s trading experience and lowers the entry barrier for retail users. Binance Options are intuitively designed and provide flexibility to option traders.
Binance Options are American-style options, where options can be exercised any time before the expiry date. It is also worth noting that Binance Options are cash-settled. Therefore, the physical delivery of the underlying asset is not required.
As of today, Binance Options tracks only one underlying asset, which is the Binance Futures BTCUSDT perpetual contract.
Table 1 specifies the contract specifications of Binance Options.
A Binance Options contract will remain valid until the holder exercises the option any time before the expiry date or when the option expires. Therefore, users do not have access to an order book as the only way out of a contract is by settlement.
How does it differ from traditional options?
In traditional options markets, traders can choose to be an option holder or writer. For instance, an option holder has the right to buy or sell the underlying asset at a pre-set price before the expiration date. On the other hand, option writers are counterparties who have an obligation to deliver the underlying asset at a pre-set price to the option buyer.
For Binance Options, Binance is the sole-issuer of the product. Thus, users can only be a buyer of Binance Options. As option holders, users of Binance Options are not exposed to unlimited downside, unlike traditional option sellers. In this case, the maximum loss would be the premium paid for the options.
1. Intuitive and straightforward design
The traditional options products typically offer multiple ranges of expiration dates and strike prices. As such, it is not uncommon to have hundreds of option contracts tracking a single underlying asset.
This market structure creates a fragmented liquidity landscape, where contracts that are far out-of-the-money and furthest away from the expiration date are notoriously illiquid. As such, trading with those contracts may pose challenges to transaction costs and trade execution.
In contrast, Binance Options provide only one strike price, which is equivalent to the price of BTCUSDT perpetual contract on Binance Futures. Therefore, users need not go through the hassle of choosing over a range of strike prices and expiration dates. In other words, Binance Options are always ‘at-the-money’.
Also, traditional options offer long-term durations, which may stretch up to 100 days and beyond. In contrast, Binance Options provides a shorter time-frame ranging from 10 minutes to 1 day. Binance Options offer a unique opportunity for investors to trade with expiry windows as small as 10 minutes apart, providing a wider selection of trading strategies to users.
2. Risk and Reward Profile of Binance Options
Binance Options has drawn comparisons with exotic options products such as Binary options, probably because of the short-term durations that it offers. However, it is worth noting that Binance Options do not adopt a fixed pay-off structure that is embedded in Binary options.
With Binance Options, the expected payoff is variable. As the price of the underlying asset moves beyond the breakeven price, Binance Options may offer unlimited upside potential with limited downside risk. In other words, profits gained from Binance Options are not capped.
Despite the differences between Binance Options and traditional options, the risk to reward profile of Binance Options share similar characteristics to traditional options.
The following illustrates the pay-off diagram for Binance’s Put and Call options:
Diagram 1 - Pay-off for Call Option
Source: Binance Futures
Diagram 2 - Pay-off for Put Option
Source: Binance Futures
Both diagrams show that as price moves beyond or below the strike price, the payoff of the option moves accordingly. If the underlying asset fails to move further than the strike price at expiration, the option expires worthless.
On both diagrams, the breakeven point would be strike price plus/minus premium (depending on call or put option).
Learn more about options here: https://www.binance.vision/economics/what-are-options-contracts
How do Binance Options differ from existing crypto options?
The most contrasting difference between Binance Options and existing crypto options is that Binance Options are American-style while existing options are European-style. This feature distinguishes Binance Options from others as American-style options allow users to exercise the options any time before the expiry date. In traditional options markets, American-style options are normally worth more than other types of options, this is because of the flexibility that it offers. Thus, it is common to have American-style options trading at a premium to European-style options.
1. Liquidity and volume
Existing crypto options markets have extremely thin order-books and low liquidity, with only a few BTC exchanging hands each transaction. This is shown by observing the daily trading volumes of existing crypto options platforms.
Daily BTC options Volume
On most days, the aggregated daily BTC options volume is below $100 million, a stark difference when compared to the daily BTC futures volume which averages at $1.5 billion.
One of the reasons for the low liquidity and volume is due to the lack of option writers/sellers, who acts as a counterparty for option holders. This is no surprise given the intensive capital requirements involved in options writing/selling, which means it is out of reach for retail users. As such, trading in these illiquid options markets may pose challenges such as wide bid-ask spreads and execution risk.
Daily BTC options volumes across Binance, Deribit, and OKex (in Millions)
Source: Binance Futures
In contrast, Binance Options market processes an enormous volume of options and has an uncapped supply, as Binance is the sole-issuer of the product. As shown, daily volumes on Binance Options have grown tremendously since its inception. In fact, it has surpassed existing option platforms by daily volumes.
2. Premium and Fees
On Binance Options, the strike price is equivalent to the price of BTCUSDT perpetual futures contract. Thus, the strike price may vary according to price changes in the underlying. For this reason, premiums will vary as well. Therefore, it is not directly comparable against existing European-style options, which are designed differently and have predetermined strike prices.
However, under conditions where both options have identical strike prices, premiums are comparable. In fact, when considering the total cost of acquiring an option and the flexibility that American-style options offer, Binance Options may be a cheaper choice.
To illustrate the difference, let’s consider a scenario where a trader wants to purchase BTC options at the current spot price of $6875.
Premium comparison Binance and Deribit options
To buy a call option on Binance, it would cost a trader $140 for a 24-hour American Option at the strike price of 6875. In contrast, it would cost $96.66 to buy an 18 hour, and $145.02 to buy a 36-hour European Option. Note that the Binance option can be executed anytime, and Deribit options must be held until Expiry. If the user resells the option on the market, the spread is roughly 20 or 0.3%.
On the other hand, users of Binance Options need not incur additional fees other than the premiums paid for the option. Meanwhile, users of other crypto options incur a trading fee in addition to the premiums paid.
Trading fees across major crypto-options platforms
Unlike existing crypto options products, Binance Options are straightforward and intuitively designed. Binance Options simplify options trading as it eliminates the need to keep track of multiple expiry dates and strike prices.
The traditional options products tend to be less liquid, especially for far out-of-the-money options. To avoid this, Binance Options are designed with only one strike price to concentrate liquidity in one contract. As such, Binance Options are competitively priced and offer deep liquidity.
Binance Options offers access to high leverage with no liquidation risks. It also offers limited downside risk as the maximum loss of option buyers is the option premium. Users can use it to speculate on short-term price movements or help reduce risk exposure in underlying assets.