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Options
Binance Vanilla Options
Vanilla Options
Binance
2020-11-09 06:23

What are Options?

(1) Options can be explained as having a right to do something at a specific time. Someone who holds an Options Contract has the right to perform a specific action at a given time in the future. A user who holds an Option (Buyer) to the expiration date can choose whether they want to exercise that right (Favorable) or give up that right (Unfavorable). The Seller of an Option is obligated to match the Buyer.
Call Option: You can buy a certain quantity of a certain commodity at a certain price within a certain period of time in the future.
Put Option: You can sell a certain quantity of a certain commodity at a certain price within a certain period of time in the future.
(2) Key elements of Options
Term
Definition
Underlying Asset
The security that you agree to buy or sell as stipulated by the Options Contract. The underlying asset of a BTC/USDT option is BTC/USDT.
Conversion Ratio
One Options Contract grants the right to buy or sell a given quantity of the underlying asset.
Exercise Time
The time at which the Buyer can exercise their right as stipulated by the Options Contract.
Strike Price
The price at which the Options Contract stipulates an asset can be bought or sold.
Exercise Quantity
Depending on how many Options Contracts are held, the exercise quantity = the number of contracts held.
Option Direction
Call Option vs. Put Option.
European Option
At the exercise time, the Option Holder can choose whether to exercise their right to buy or sell.
American Option
The Option Holder can choose to exercise the option at any time up to the exercise time.
Premium
This is the amount paid by the Option Buyer to buy the Options Contract.
Exercise
The process by which the Option Buyer chooses to execute their right.
Based on the relationship between the Option Strike Price and the price of the underlying asset, Options can be divided into three categories: In-the-money, Out-of-the-money, and At-the-money.
Option Contract Direction
Strike price = S. Underlying asset (token) price = P.
Option Contract Classification
Call Option
P > S
In-the-money
P < S
Out-of-the-money
P = S
At-the-money
Put Option
P > S
Out-of-the-money
P < S
In-the-money
P = S
At-the-money
At the time of expiration, if Alice, the Option Holder, chooses to exercise the Option by selling to Bob:
Call Option: A certain amount of a certain commodity can be bought at a certain price at a certain time in the future.
Put Option: A certain amount of a certain commodity can be sold at a certain price at a certain time in the future.
In this scenario, Alice and Bob need to prepare the appropriate quantity of assets before they can exercise the Option. Therefore, there are two ways in which the Option can be exercised:
Method
Definition
Physical Settlement
Before the asset can be bought or sold at the amount stipulated in the contract, Alice and Bob have to prepare the relevant assets. Since physical assets have to be prepared in order to complete the transaction, this is referred to as Physical Settlement.
Cash Settlement
Alice is the Option Holder, so it is only beneficial for Alice to exercise the Option. Here, Alice makes a direct profit off of Bob based on the difference in price without actually buying or selling anything.
(3) Explanation of Options
What is the easiest way to explain the relationship between profit and Call and Put Options?
Suppose that BTC/USDT is currently trading at $8000 and the Option Contract grants the holder the right to buy or sell BTC/USDT at a price of $8000 in the future.
Alice buys an Option Contract from Bob;
(a) If the price of BTC/USDT continues to rise, regardless of how much the price goes up, Alice has the right to buy BTC/USDT at the price of $8000 at the time the contract expires. Therefore, the more the price of BTC/USDT goes up, the more profit Alice makes.
(b) If the price of BTCUSDT continues to fall, regardless of how much the price goes down, Alice has the right to sell BTC/USDT at the price of $8000 at the time the contract expires. Therefore, the more the price of BTC/USDT goes down, the more profit Alice makes.
Therefore, the amount of profit that can be made on a Call Option increases as the price of a commodity goes up, while the amount of profit that can be made on a Put Option increases as the price of a commodity goes down.
Alice will choose to exercise the Option only if she can make a profit. If the price of BTC/USDT falls to $7000 and Alice holds a Call Option with a strike price of $8000, then Alice would lose money if she chooses to exercise the Option. Therefore, she will choose to give up the Option instead.
Alice makes profit off of Bob. It is important to note that Binance Options use the cash settlement method, so Bob only needs to pay the difference in price to Alice in order to exercise the Option.

Option Contract Details

All Binance Options Contracts are priced and settled in USDT. This allows users to act as direct buyers or sellers when purchasing or issuing Options. Since Option Buyers can choose to exercise the Option at a later date, the Option Seller needs to freeze collaterals in the meantime. This ensures that the Option Buyer does not run into any problems when they go to exercise the Option.
For the Seller, profit comes from the cost of the Option. For example, if after buying an Option there is no profit to be made by holding due to the difference between the last price of the underlying asset and the strike price, the Buyer will choose to give up the right to exercise the option. The Option Seller would not need to pay any extra fees and the collateral will be returned to the seller.
Contract name: BTCUSDT-201212-10000-C
[Contract name interpretation]: "Underlying asset-expiration time-exercise price-type"
Underlying Asset
BTC/USDT
Expiration Time
2020-12-12 16:00:00 (UTC+8, 16:00 is the set expiration time)
Strike Price
10000
Option Style
C (Call Option), P (Put Option)
[Other Option Contract Parameters]
Contract Type
European Option
Valuation Unit
USDT
Minimum Contract Price
0.0001 USDT
Contract Ratio
One contract represents the right to buy or sell the underlying asset at a quantity of XXX.
Trading Time
The time the asset hits the market to the exercise time. Trading goes on 24/7.
Settlement Method
Cash Settlement
Settlement Price Calculation Method
The arithmetic mean of the trading price during the 1 hour preceding the expiration time as indexed by the platform.
Index Components and Weights
See Index Description
[Criteria for Option Sellers]
Contract Name
BTCUSDT-201212-10000-C
Minimum Issue Amount
200 USDT
Collateral Asset
USDT
Collateral Ratio
50%
1. Binance Option Contract Analysis
(1) Due to the unequal nature of rights granted by options contracts, the person who chooses the right will always be the option buyer and the seller must honor their related obligations.
(2) In the process of completing an option transaction, only the buyer has to pay the premium. The option seller is responsible for supplying enough collateral to ensure that the option can later be exercised without any problems.
(3) Income from Options is unlimited since profit comes from the difference between the price of the underlying asset and the Strike Price. Under the condition that the Strike Price is determined before the contract is launched and the price of the underlying asset is uncertain, the potential profit from buying a contract is unlimited. Therefore, the Option Seller has to provide sufficient collateral. If not enough collateral is provided, the Option Seller will undergo forced liquidation and lose all of their collateral.
(4) As an Option Buyer, you can decide to give up the right granted by the Option, so the biggest loss to the buyer is having to pay the premium.
Buyer: Unlimited profit, biggest loss is the premium.
Seller: Biggest profit is the premium, unlimited losses.
(5) Binance uses a transparent quoting method, so all users can participate in buying and selling Options and are free to quote prices.
(6) In regards to T-type Options, Binance offers a variety of Option combinations. This provides Options Contracts with different premiums/expiration times. When all Options are arranged in a specific order, they look like a giant letter T. Therefore, Options that use this type of quotation model are referred to as T-type Options.
(7) Options Sellers do not have to provide 100% collateral, which makes it much easier for them to make use of their funds. Meanwhile, the risk control system monitors all positions held by Options Sellers to automatically reduce the seller's holdings through reduce liquidation and forced liquidation, thereby reducing the impact of users' positions on the market as much as possible.
(8) Seller collateral on Binance Options uses the cross margin model, so all assets in the Options account are used as collateral for Sellers. Once forced liquidation is triggered, the Seller will lose all of the assets in their Options account.

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 Price
The benchmark price of an Option. The Option Mark Price is derived using the BS formula.
order margin
Collateral for unsettled transactions which are frozen when orders are pending.
Position margin
(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 Margin
If the account equity falls below the maintenance margin, the Option position will undergo forced liquidation (Seller).
Available
Available = Max [Min (equity, account balance) – Position margin– Order margin, 0].

Option Mark Price

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

Fee Calculation

Option fees have two parts: the transaction fee and the fee to exercise.
Transaction fees are bidrectional, so fees are paid twice when a position is opened, but no fees are paid when a position is closed.
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. 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.

Trading

Binance 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

Order Margin
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 Option 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 Option position. That is, you can naked sell an Option, which means that the Option 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.
3. 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 Option Seller.
Buy-to-close: After naked selling an Option, the user holds a short position, which can be closed by buying Options.
Position Margin
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.
Reduce Liquidation
Reduce Liquidation is triggered when the collateral in a user's Options account reaches the margin threshold. When a user's margin balance falls below the reduce margin, Counterparty Liquidation is triggered.
Buyer: Buyers do not need to worry about Counterparty Liquidation as there is no reduce magin for long positon.
Maintenance Margin
Maintenance Margin 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 Maintenance Margin, forced liquidation is triggered.
Buyer: Buyers do not need to worry about forced liquidation as there is no Maintenance Margin for long position.
Since changes in equity are always linear in the system, Reduce 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 ≥ Strike price
(A) 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.
(B) Put Option
Buyer: If profit is < 0, the right to exercise the Option is given up.
Seller: All collateral is returned.
2. The final stipulated price is < Strike price
(C) Call Option
Buyer: If profit is < 0, the right to exercise the Option is given up.
Seller: Does not apply.
(D) 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.

Automatic Reduce Liquidation

For users who hold positions as Option Sellers, price fluctuations can trigger risk control. The risk control system has two steps:
1. When user Margin Balance≤ the reduce margin, reduce liquidation is automatically triggered.
In the automatic reduce liquidation stage, all of the user's unfilled orders will be canceled. In this situation, the user is unable to take out margin, but they can still transfer funds from their Spot account to make margin balance > the reduce margin , thereby avoiding reduce liquidation.
If the user holds multiple types of positions and automatic reduce liquidation is triggered, long positions will be force-liquidated first, followed by reduce liquidation of short positions.
Once reduce liquidation is triggered, the user will have to pay a reduce liquidation fee. This fee will be stored in the Margin Risk Fund in order to compensate users were force-liquidated.
When user margin balance > the reduce margin, automatic reduce liquidation will be halted. When user margin balance ≤ the reduce margin, forced liquidation (2) will be triggered.
2. Forced Liquidation
When user account equity ≤ maintenance margin, forced liquidation logic is triggered.
If the user holds multiple types of positions and forced liquidation is triggered, long positions will be force-liquidated first. After long positions are force-liquidated, the risk control system will take all of the user's Option positions and deduct the amount from the user's account balance.

Forced Counterparty Liquidation

Due the unequal power associated with Options, it may be difficult for orders of force-liquidated short Options to be fully filled by the market. Therefore, when a forced liquidation event occurs, the risk control system may use the forced counterparty liquidation model.
After a user triggers forced liquidation, the risk control system will take over the user's positions and account balance. Based on the account balance and the user's positions, the risk control system calculates the forced counterparty liquidation price. Then, it ranks the positions from highest to lowest based on the expected earnings rate of the positions. The risk control system then matches users with force-liquidated positions directly with the highest-ranked positions undergoing forced counterparty liquidation positions, thereby ensuring that the orders get filled.
In brief, for users who have a high earnings rate on Option positions they purchase and hold, their positions can be force-reduced when forced liquidation occurs. These orders do not appear in the market order book and the K line. You can still view orders for positions that undergo forced counterparty liquidation in your personal margin history. Additionally, Binance has introduced a Margin Risk Fund, which is used to compensate users who undergo forced counterparty liquidation.

Risk Control Parameters

Price Limit and Position Limit Risk Control

Option price/position limits are an important means of preventing malicious market manipulation in the short-term. Put simply, there are upper and lower price limits and upper limits on position size.
(1) Price Limit Risk Control Parameters
  • Risk control using price limits follows certain guidelines. The buyer has to comply with the maximum price limit, while the seller has to comply with the minimum price limit.
  • Maximum price limit = Option mark price + Adjustment factor × Max (1, 4 × abs (delta))
  • Minimum price limit = Option mark price + Adjustment factor × Max (1, 4 × abs (delta))
(2) Position Limit Risk Control Parameters
  • Single Order - Margin amount cannot exceed 40 BTC.
  • Single contract - Current open order cannot exceed 20.
  • Single contract - Total position amount cannot exceed 2500BTC.
  • Contracts with the same underlying index - Current unfilled orders cannot exceed 30.
  • Contracts with the same underlying index - Total amount of open positions cannot exceed 2500 BTC.
  • Contracts with the same underlying asset - Positions in the buying direction cannot exceed 1000 BTC.
  • Contracts with the same underlying asset - Positions in the selling direction cannot exceed 1000 BTC.

Advanced Parameters

Delta:
Change in the Option price for every 1 USDT change in the price of the underlying asset.
Delta = Change in Option price / Change in the price of the underlying asset.
Delta is an important statistical indicator used in Option trading. It represents how much the price of the Options Contract changes in relation to the price of the underlying asset. In other words, it determines how much the price of an Options Contract will change, theoretically, when the price of the underlying asset changes by 1 USDT. For example, if the Delta value of a BTC/USDT call option is 0.5 and the price of the underlying asset increases by 1 USDT, the price of the Option Contract will increase by 0.5 USDT. While the price of a Call Option increases as the price of the underlying asset increases, the price of a Put Option increases as the price of the underlying asset decreases. Therefore, the Delta value of Call Options will be greater than 0 while the Delta value for Put Options will be less than 0. In fact, the Delta value for Call Options will always be between 0 and 1, while the Delta value for Put Options will always be between -1 and 0.
Gamma:
The degree of the change in Delta for every 1 USDT change in the price of the underlying asset.
If the Delta is 0.6 and the Gamma is 0.05, then if the price of the underlying asset increases 1 USDT, the Delta will increase by 0.05. The Delta will increase from 0.6 to 0.65.
Since Options frequently become In-the-money or Out-of-the-money when the exercise time draws near, the Delta value becomes extremely sensitive to changes in the price of the underlying asset. Spot fluctuations often lead to bigger changes in Delta value. At this time, the Gamma value becomes particularly important. The Gamma value is always a positive number.
As the time to exercise the Option draws near, a slight increase in the last exercise price causes the Delta value of the Options Contracts to change from closer to 0 to closer to 1, which produces a high Gamma value. This is especially true when the Exercise Price is extremely close to the Strike Price. In this situation, risk is relatively greater since the price of the underlying asset only has to fall a little bit in order to render the would-be profitable Call Option worthless. Typically, the higher the Gamma, the higher the risk; the lower the Gamma, the lower the risk. This is also referred to as Gamma Risk.
Theta:
The degree of change in the price of an Options Contract during a given period of time (usually a day). We often call this the time value of Options Contracts.
Theta values are usually negative because the price of an Options Contract usually decreases over time.
The longer until the exercise time of an Option and the more uncertain factors there are, the greater the time value of the Option. In theory, the shorter until the Option exercise time, the greater the Theta value of the Option. This is because as the Option exercise time approaches, the time value of the Option decreases more rapidly. In particular, as Out-of-the-money Options approach the exercise time, their value moves closer to 0. At this time, time decay occurs especially fast and massive Option price decay is often seen in the last time period before the exercise time.
Vega:
Vega = Change in Option price / Change in rate of volatility of the underlying asset.
If Vega = 0.2, the price of the Option increases 0.2 when there is a 1% change in the rate of volatility of the underlying asset.
Just like the Mark Price, the Option Contract Price fluctuates constantly. However, fluctuations in Mark Price and fluctuations in the Option Contract Price do not appear to have a direct linear relationship. Stocks that have more violent price fluctuations usually cause the price of the corresponding Options Contracts to become inflated, but under certain circumstances, changes in stock price can also cause very small changes in the Option Contract Price.
Regardless of the reason, the importance of Vega only becomes more clear when there are drastic changes in stock price.
Note: In the above example, the Option conversion ratio is 1 Option Contract to 1 BTC/USDT.

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