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Here’s What You Need To Know About Binance Options

2020-04-15

Key Takeaways:

  • Binance Options are a simplified version of traditional options and are designed to enhance users’ trading experience, lowering the entry barrier for retail investors.

  • These derivative contracts will remain valid until the holder exercises the option any time before the expiry date or when the option expires.

  • Binance Options provide only one strike price, which is equivalent to the price of BTCUSDT perpetual contract on Binance Futures.

Binance Options offer a unique set of benefits for traders and can attract lesser risk when compared to Futures. This form of crypto derivatives gives traders the avenue to predict and take advantage of price alterations.

Market participants trade Binance Options because they offer a comparatively low-risk and low-cost solution during trading. This is especially the case when you consider options in relation to perpetual swaps and crypto futures.

So let’s explore what Binance Options are and why you should get involved!

What Are Binance Options?

Binance Options are a simplified version of traditional options and are designed to enhance users’ trading experience, lowering the entry barrier for retail investors. This form of crypto derivatives is intuitively designed to 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, making, the physical delivery of the underlying asset not required.

Contract Specifications

As of today, Binance Options track 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 are not exposed to the 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. Users do not need go through the hassle of choosing a range of strike prices and expiration dates. In other words, Binance Options are always ‘at-the-money’. 

Traditional options offer long-term durations, which may stretch up to 100 days and beyond. In contrast, Binance Options provide 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 risks profits are not capped. 

Despite the differences between Binance Options and traditional options, the risk-to-reward profile shares similar characteristics. 

The following graph 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 the 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 or minus premium (depending on the call or put option).

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, allowing 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 on each transaction. This is shown by observing the daily trading volumes of existing crypto options platforms.

Daily BTC options Volume 

Source: Skew

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 buyers and sellers, who act as a counterparty for option holders. This is no surprise given the intensive capital requirements involved in options buying and 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 process an enormous volume of options and has an uncapped supply because Binance is the sole issuer of the product. As demonstrated before, daily volumes on Binance Options have grown tremendously since its inception, surpassing 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. It may vary according to price changes in the underlying asset, making premiums vary as well. Therefore, it is not directly comparable to existing European-style options, which are designed differently and have predetermined strike prices.

Under conditions where both options have identical strike prices, premiums are comparable. 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 spot price of $6,875.

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 $6,875. In contrast, it would cost $96.66 to buy an 18 hour option, 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%.

Users of Binance Options do not need incur additional fees other than the premiums paid for the option while users of other crypto options incur a trading fee in addition to the premiums paid. 

Trading fees across major crypto-options platforms

In Summary

Unlike existing crypto options products, Binance Options are straightforward and intuitively designed. This form of crypto derivatives simplifies 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 offer 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.

Read the following helpful articles for more information about Binance Options:

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