1. What is contract trading?
1 Contract trading refers to the agreement between the buyer and the seller to receive a certain amount of a certain asset at a specified price at a certain time in the future. The trading object of contract trading is a standardized contract uniformly formulated by the exchange. The exchange stipulates standardized information such as the type of commodity, trading time, quantity, etc. The contract represents the rights and obligations of the buyer and the seller.
To put it simply, it means to agree to trade a certain quantity of a certain commodity at a certain time and place in the future.
2 Contract trading is a kind of financial derivative. Compared with spot market trading, users can judge the rise and fall in futures contract trading and choose to buy long or sell short contracts to obtain profits from price increases or decreases.
2. What is the role of contract trading?
The original intention of designing standardized contracts was to hedge spot risks. In order to lock in profit costs and hedge the risks of large fluctuations in spot prices, companies or individuals engaged in commodity trading will place short (long) orders of the same position in the futures market to hedge against risks.
Contract transactions of digital assets represented by Bitcoin usually adopt price difference delivery. When the contract expires, the system will settle all unclosed positions at the delivery price.
3. Contract Trading Rules
1 Trading Hours
Contract trading is available 24/7, and trading is interrupted only during the settlement or delivery period at 16:00 (UTC+8) every Friday. In the last 10 minutes before delivery, you can only close a position, not open one.
2 Transaction Types
There are two types of transactions: opening and closing. Opening and closing are divided into two directions: buying and selling:
Buying to open long (bullish) means that when the user is bullish on the index, he/she buys a certain number of contracts. After the "buy to open long" operation is successfully matched, the long position will be increased.
Sell to close long (long position closing) means that the user no longer has a bullish view on the future index market and buys back the selling contract to offset the current buy contract and exit the market. Performing the "sell to close long" operation will reduce the long position after the match is successful.
Selling to open short (bearish) means that when the user is bearish or bearish on the index, he/she sells a certain number of certain contracts. After the "sell to open short" operation is successfully matched, the short position will be increased.
Buy to close short (close short position) means that the user is no longer bearish on the future index market and buys back the contract to offset the current sell contract and exit the market. Performing the "buy to close short" operation will reduce the short position after the match is successful.
3 Order Methods
Limit Order: Users need to specify the price and quantity of the order. Limit Order can be used for both opening and closing positions.
Counterparty price order: If the user chooses to place an order at the counterparty price, the user can only enter the order quantity and cannot enter the order price. The system will read the latest counterparty price (if the user buys, the counterparty price is the sell 1 price; if the user sells, the counterparty price is the buy 1 price) at the moment of receiving this order, and place a limit order at this counterparty price.
4 Positions
After the user opens a position and completes the transaction, he/she will have a position, and the positions of the same contract in the same direction will be merged. In one contract account, there can be a maximum of 6 positions, namely, long position of the current week contract, short position of the current week contract, long position of the next week contract, short position of the next week contract, long position of the quarterly contract, and short position of the quarterly contract.
5 Order restrictions
The platform will impose restrictions on the number of positions held by a single user in a certain period of contracts and the number of orders for opening/closing a single position to prevent users from manipulating the market.
When the number of positions or the number of orders held by a user is too large and the platform believes that it may pose a serious risk to the system and other users, the platform has the right to require the user to adopt risk control measures including but not limited to order cancellation and position closing. The platform has the right to adopt risk control measures including but not limited to limiting the total number of positions, limiting the total number of orders, limiting opening positions, order cancellation, forced position closing, etc.
4. Margin
1 What is margin?
In the virtual contract market, users only need to pay a small amount of funds at a certain ratio based on the contract price as financial guarantee for fulfilling the contract, and they can participate in the buying and selling of contracts. This kind of funds is the virtual contract deposit.
For example, if you hold a BTC 10x bullish call, it is equivalent to having 10 BTC. If it rises by 10 points, you will have 2 BTC (actually 1.909, the specific algorithm will be explained later). But if it falls, you will lose this BTC first, and this BTC is the margin.
2 What is leverage?
Leverage is a common financial trading system, namely the margin system. While "leverage" allows investors to increase their trading amount, it also increases the returns and risks they take. In other words, it amplifies the returns and risks.
3 There are two types of margin modes:
1 Full Position Mode
After a user opens a position, the risks and benefits of all positions in the account are calculated together, and the margin required for holding positions will change with the latest transaction price. Under the full-position margin mode, the requirement for opening a position is that the margin rate after opening a position cannot be lower than 100%.
2. Position-by-position mode
The margin and income of each contract's two-way position will be calculated independently. Only when the available margin for opening a position is greater than or equal to the amount of margin required for opening a position, can the user place an order. When margining each contract individually, the available margin for opening a position may be inconsistent.
It can be understood that full position means putting all funds in a pool, and single position means putting part of the funds in a pool. If the full position is liquidated, all funds will be reduced to zero. If single position is liquidated, part of the funds will be reduced to zero, but single position is more likely to be liquidated than full position, mainly because of leverage. If the leverage is 10 times, if the full position only places half of the funds, the leverage is equivalent to 5 times.
4. Margin Calculation Formula
Position margin = (contract face value * number of open contracts) / latest transaction price / leverage multiple
For example, the latest price of BTC is 4000USD, the leverage ratio is 10, the contract value of BTC is 100USD, and 40 contracts are bought. The position margin = (100*40)/4000/10=0.1BTC
That is, if you buy 40 contracts at a price of 4000 USD and place an order for 0.1 BTC with a 10x leverage, it is equivalent to placing an order for 1 BTC.
5. Margin Rate:
The margin rate is an indicator to measure the risk of user assets. The smaller the margin rate, the higher the risk of the account. When the margin rate is less than or equal to 0, your position will be forced to close by the system.
Margin rate = (account equity/occupied margin) * 100% - adjustment factor
Occupied margin = Position margin + Frozen margin
The adjustment coefficient is designed to prevent users from being liquidated. Each leverage ratio of each product has a corresponding adjustment coefficient. For example, the adjustment coefficient of 10x leverage of BTC contract is 15%, the adjustment coefficient of 20x leverage is 30%, and the adjustment coefficient of 5x leverage is 8%.
For example:
The user's contract account equity is 2BTC. He opens 100 quarterly contracts (with a contract value of 100USD) at a price of 5000USD/BTC, with a leverage of 10 times and an adjustment factor of 15%. Without considering the transaction fee, the user's forced liquidation price is 2537.5.
5. Account Equity and Profit and Loss Calculation
1 Contract Account Rights
The contract account equity is the total equity of the contract account of this currency.
Contract account equity = account balance + realized profit and loss this week + unrealized profit and loss this week
2 Account Balance
The account balance refers to the amount of currency held by the user in the contract account, that is, the amount of currency transferred from the currency account to the contract account. During liquidation, the realized profit or loss generated by the user's transaction will be increased or decreased in this item.
3 Unrealized Profit and Loss
Unrealized profit and loss is the profit and loss of the user's current position. The unrealized profit and loss will change with the latest transaction price.
Long position unrealized profit and loss = (1/average position price - 1/latest transaction price) * number of long position contracts * contract face value
Unrealized profit and loss of short position = (1/latest transaction price - 1/average position price) * number of short position contracts * contract face value
For example:
For example, if a user holds 100 BTC quarterly contract long positions (with a contract value of 100 USD), the average price of the position is 5000 USD/BTC. If the current latest price is 8000 USD/BTC, the current unrealized profit and loss = (1/5000-1/8000)*100*100 = 0.75 BTC.
From the mathematical form of the formula, it is not easy to understand the algorithm. Many friends did not understand before. It was obviously 10 times the long position, but why did it increase by 10 points? My profit did not reach 100%. I always felt that the exchange was cheating me again.
This is how I understand it:
When the price of Bitcoin is 4000 USD, you bring one Bitcoin to play in the futures casino. The casino will pay you 4000 USD. For example, if you bet 10 times (open long), the price rises by 10% to 4400 USD. At this time, the casino will pay you 4000*10*0.1=4000 USD. But the chips you gave when you entered the casino are BTC, and now you have to pay BTC back. At this time, the price of Bitcoin is 4400, so the Bitcoin you get is 4000/4400=0.9090 BTC.
The rate of return is 0.9090/1*100%=90.9%
Reorganize from:
Average holding price: 4000USD
Latest transaction price: 4400USD
Rise/Fall: (4400-4000)/4400*100%=10%
Number of long contracts: 1*10*4000/100=400 (number of bitcoins ordered*leverage multiple*average position price/contract face value)
Holding value: 1*10*4000=40000USD (number of bitcoins ordered*leverage multiple*average holding price)
Opening margin: 1BTC (number of open positions * contract value / leverage multiple / average position price)
USD income: 40000 * 10% = 4000USD holding value * price increase or decrease
BTC income: 40000 * 10% / 4400 = 0.909 BTC holding value * price increase or decrease / latest transaction price
USD yield: (4400-4000)/4400*100%=10% (increase or decrease)
BTC yield: 40000 * 10% /4400/1 *100% =90.9% (BTC yield/opening margin)
Do you feel more dizzy after reading the formula above?
4 Realized Profit and Loss
Realized profit and loss refers to the profit and loss generated by the user's closed positions, as well as the transaction fees, and the profit and loss in the account balance that has not yet been calculated through liquidation. Realized profit and loss cannot be transferred out of the contract account before the contract is settled/delivered.
Realized profit and loss for each closed position:
Realized profit and loss of long positions = (1/average position price - 1/average closing price) * number of long position contracts closed * contract face value
Realized profit and loss of short position = (1/average closing price - 1/average holding price) * number of short position contracts closed * contract value
The comparison between realized profit and loss and unrealized profit and loss is the profit and loss that has been closed and settled, so the difference in the calculation formula is the difference between calculating according to the latest price and the average price of closing transactions.