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Options
Binance Vanilla Options
How Does Vanilla Options Contract Works
Binance
2020-12-25 06:33

Options Account Structure

Binance has designed a separate Options account for each user. This account uses USDT as the trading and settlement currency.
Binance Options accounts allow users to transfer assets to and from their Spot account. USDT can be transferred to a user's Options account from their Spot account, or from their Options account to their Spot account.
Options Account Keyword Definitions:
Account Equity
Account equity = Account balance + Unrealized profit and loss (Seller) + Position value (Buyer).
Account balance = Total amount transferred in − Total amount transferred out + Realized profit and loss − Total fees.
Position value (Buyer) = Number of positions (Buyer) × Option mark price.
Option Mark PriceThe benchmark price of an Option. The Option Mark Price is derived using the BS formula.
Margin CollateralCollateral for unsettled transactions which are frozen when orders are pending.
Position Collateral(Seller) Collateral for issuing and selling Option Contracts.
Unrealized Profit/Loss
Unrealized profit/loss = (Option mark price – Average position price) × Number of positions.
Herein, the number of positions can be negative (Seller).
Maintenance MarginIf the account equity falls below the maintenance margin, the Option position will undergo forced liquidation (Seller).
AvailableAvailable = Max [Min (equity, account balance) – Position collateral – Margin collateral, 0].

Options Mark Price

The Options Mark Price is the value of the Option as reported by the risk control system, which is calculated using position collateral and unrealized profit/loss. The Options Mark Price is used in the risk control system and can be considered as the reasonable theoretical price of the Options Contract at the current point in time.

Margin Collateral

The Options Buyer needs to have sufficient funds to buy the Option in order to possess the right granted by the Option Contract. Meanwhile, the Options Seller needs to have sufficient funds to ensure that the right can be exercised without any problems. Therefore, the Seller has to deposit margin collateral.
  1. When a user buys an Option, the purchase does not involve using leverage or borrowing funds. The act of buying an Option is a Spot transaction – you only need to provide sufficient funds to buy the Option directly.
  2. When a user wants to issue an Option Contract to sell, it can be done in one of two ways:
First: You can sell an Option if you hold an Options position (the position created by buying an Option), which is essentially transferring the right granted by the Option. This aspect is the same in Spot trading;
Second: You can sell an Option if you do not hold an Options position. That is, you can naked sell an Option, which means that the Options Seller, the person with the obligation, is selling the Option on margin and, therefore, has to freeze margin collateral.
Because of this, it is necessary to determine a user's trading behavior based on each trade and freeze the user's funds as collateral.
  1. In light of this, we have defined a series of trading behaviors:
Buy-to-open: The user buys the Option directly so that after the transaction, they hold a larger position.
Sell-to-close: If the user has an open position, they sell an amount less than or equal to their holdings, which closes the position.
Sell-to-open: The user naked sells an Option, thereby becoming the Options Seller.
Buy-to-close: After naked selling an Option, the user holds a short position, which can be closed by buying Options.

Fee Calculation

Option fees have two parts: the transaction fee and the fee to exercise.
A transaction fee will be charged after the transaction.
Premiums are unidirectional, so if the buyer's profit when the Option is exercised is >0, the buyer will pay a fee.
  1. Transaction fee = Index price × Transaction fee rate.
  2. The fee to exercise = Exercise price × Fee to exercise rate.
  3. The transaction fee will not exceed 10% of the amount of the transaction.
  4. The fee to exercise will not exceed 10% of the profit gained by exercising the Option.
Transaction fees for each transaction are calculated based on the index price at the time of order completion.
Transaction fee rate:0.03% of the underlying value
Exercise fee rate : 0.015% of the underlying value

Trading

Binance Vanilla Options are European-style Options, so the buyer cannot choose whether to exercise their right until the expiration time. From the start time to the time the Option is exercised, the user is able to buy or sell directly.
Operation 1: First, buy an Option, and then sell it. Here, you buy a contract and then transfer (sell) it to another user. Buy low, sell high. Profits are made on the difference in price. Since the right has already been transferred (sold), it does not matter whether the Option is exercised later on.
Operation 2: First, sell an Option, and then buy it back. Here, you act as a seller first and then buy the Option back later. The seller's obligations are also transferred. Sell high, buy low. Profits are made on the difference in price. Since the obligation has already been transferred (bought), it does not matter whether the Option is exercised later on.

Position Description

In order to better show the status of current positions, Option positions opened by buying Options are displayed as a positive number, while positions that are opened by naked selling are displayed as a negative number.

Collateral Description

Margin Collateral
The Option Buyer needs to have sufficient funds to buy the Option in order to possess the right granted by the Option Contract. Meanwhile, the Options Seller needs to have sufficient funds to ensure that the right can be exercised without any problems. Therefore, the seller has to deposit margin collateral.
  1. When a user buys an Option, the purchase does not involve using leverage or borrowing funds. The act of buying an Option is a Spot transaction – you only need to provide sufficient funds to buy the Option directly.
  2. When a user wants to issue an Option Contract to sell, it can be done in one of two ways:
First: The user has an open Option position (by buying Options) and sells the Option, which is essentially transferring the right granted by the Option. This aspect is the same as in Spot trading.
Second: You can sell an Option if you do not hold an Options position. That is, you can naked sell an Option, which means that the Options Seller, the person with the obligation, is selling the Option on margin and, therefore, has to freeze margin collateral.
Because of this, it is necessary to determine a user's trading behavior based on each trade and freeze the user's funds as collateral.
  1. In light of this, we have defined a series of trading behaviors:
Buy-to-open: The user buys the Option directly so that after the transaction, they hold a larger position.
Sell-to-close: If the user has an open position, they sell an amount less than or equal to their holdings, which closes the position.
Sell-to-open: The user naked sells an Option, thereby becoming the Options Seller.
Buy-to-close: After naked selling an Option, the user holds a short position, which can be closed by buying Options.
Position Collateral
When buying Options, the buyer pays the premium, so they do not need to worry about position collateral.
Once the seller completes a Sell-to-open, the collateral for the short position is used as the Seller's position collateral.
Counterparty Liquidation
Counterparty Liquidation is triggered when the collateral in a user's Options account reaches the collateral threshold. When a user's account equity falls below the Counterparty Liquidation collateral level, Counterparty Liquidation is triggered.
Buyer: Buyers do not need to worry about Counterparty Liquidation as there is no risk control for counterparty liquidation of collateral.
Collateral Maintenance
Collateral Maintenance is also referred to as Collateral Forced Liquidation. Collateral Maintenance is the collateral threshold at which forced liquidation is triggered for a user's Options account. When a user's account equity falls below the Collateral Maintenance level, forced liquidation is triggered.
Buyer: Buyers do not need to worry about forced liquidation as there is no risk control for forced liquidation.
Since changes in equity are always linear in the system, Counterparty Liquidation will be triggered for the user's account before forced liquidation.

Exercising Options

Exercising Options is also referred to as the Option Buyer's ability to exercise a right based on the Options Contract. The Buyer can choose whether or not to exercise the right and the Option Seller is obligated to cooperate with the Buyer should they decide to exercise that right.
Binance Options uses cash settlement. For Option Buyers, if profit is >0 after they exercise an Option, settlement automatically occurs once the Option is exercised. If profit from exercising the option is < 0, the Option is automatically given up on behalf of the Buyer. This process is completed automatically, and profit is automatically calculated for every user who participates in trading.
How Options are Exercised
  1. The final stipulated price is ≥ the Strike price
  2. Call Option
Buyer: If profit is > 0, the Option is automatically exercised, the fee to exercise is deducted, and the Buyer receives USDT.
Seller: Cooperates with the Buyer to exercise the Option. The Buyer's profit is deducted, and the remaining collateral is returned.
  1. Put Option
Buyer: If profit is < 0, the right to exercise the Option is given up.
Seller: All collateral is returned.
  1. The final stipulated price is < Strike price
  2. Call Option
Buyer: If profit is < 0, the right to exercise the Option is given up.
Seller: Does not apply.
  1. Put Option
Buyer: If profit is > 0, the Option is automatically exercised, the fee to exercise is deducted, and the Buyer receives USDT.
Seller: Cooperates with the Buyer to exercise the Option. The Buyer's profit is deducted, and the remaining collateral is returned.

Spot Index

In order to increase the Seller's ability to use their collateral, Binance Options does not require Sellers to provide 100% collateral. Option Sellers may not have enough collateral or undergo Forced Liquidation. Unrealized profit and loss is the main cause of Forced Liquidation. Therefore, it seems especially important that calculations of Unrealized profit and loss are exact. In Options, Unrealized profit and loss mainly comes from the cost of opening an Options position and the calculation of the Mark Price. The Option Mark Price is calculated using the Spot Index Price and other parameters. Therefore, it is especially important that the Spot Index is stable.
The Spot Price Index used for Binance Options Contracts can be regarded as a Fair Spot Price. The Option Spot Price Index used by
Binance is same to Price Index of USDT-Margined Perpetual Futures Contract .The index price is an average of the prices on the major markets constitutes the “Price Index” which is the primary component of Mark Price.
The Price Index is a bucket of prices from the major Spot Market Exchanges, weighted by their relative volume. The Price Index for USDT-margined contracts derived prices from Huobi, Bitterex, HitBTC, Gate.io, Bitmax, Poloniex, FTX, MXC.
The Price Index references for each USDT-margined futures contracts are as follows:
There are additional protections to avoid poor market performance during outages of Spot Exchanges or during connectivity problems. These protections are listed below:
  1. Single price source deviation: When the latest price of a certain exchange deviates more than 5% from the median price of all price sources, the exchange weight will be set to zero for weighting purposes.
  2. Multi price source deviation: If more than 1 exchange shows greater than 5% deviation, the median price of all price sources will be used as the index value instead of the weighted average.
  3. Exchange Connectivity Problem: If we can’t access the data feed for exchange and this exchange has trades updated in the last 10 seconds, we can take price data from the last result and use it for index calculation.
If one exchange has no updates for 10 seconds, the weight of this exchange will be zero when calculating the weighted average.
Now that we’ve computed the Price Index, which can be considered as the “Spot Price”, we can move forward in calculating the Mark Price which is used for all Unrealized PnL calculations. Note that Realized PnL is still based on the actual executed market prices.

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