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Binance Vanilla Options
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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) × Options mark price.
Options Mark PriceThe benchmark price of an Options Contract. The Options Mark Price is derived using the BS formula.
Order Margin The margin for unsettled transactions which are frozen when orders are pending.
Position Margin(Seller) Margin for issuing and selling Options Contracts.
Unrealized Profit/Loss
Unrealized Profit/loss = (Options 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 Options position will undergo forced liquidation (Seller).
AvailableAvailable = Max [Min (equity, account balance) – Position Margin – Order Margin, 0].

Options Mark Price

The Options Mark Price is the value of the Options as reported by the risk control system, which is calculated using position Margin 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.

Fee Calculation

Options fees have two parts: the transaction fee and the fee to exercise.
Transaction fee will be charged after the transaction.
Premiums are unidirectional, so if the buyer's profit when the Options 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 Options.
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 : 0.1% 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 Options are exercised, the user is able to buy or sell directly.
Operation 1: First, buy an Options 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 Options is exercised later on.
Operation 2: First, sell an Options and then buy it back. Here, you act as a seller first and then buy the Options 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 Options are exercised later on.

Position Description

In order to better show the status of current positions, Options 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.

Margin Description

Order Margin
The Options Buyer needs to have sufficient funds to buy the Options in order to possess the right granted by the Options Contract. Meanwhile, the Options Seller needs to have sufficient funds to ensure that the right can be exercised without any problems.
  1. When a user buys an Options, the purchase does not involve using leverage or borrowing funds. The act of buying an Options is a Spot transaction – you only need to provide sufficient funds to buy the Options directly.
  2. When a user wants to issue an Options Contract to sell, it can be done in one of two ways:
First: The user has an open Options position (by buying Options) and sells the Options, which is essentially transferring the right granted by the Options. This aspect is the same as in Spot trading.
Second: You can sell an options contract if you do not hold an Options position. That is, you can naked sell an Options, which means that the Options Seller, the person with the obligation, is selling the Options 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.
Buy to openNone
Sell to open{ Maximum [ Index Price * 10% , Maximum ( index Price * 10% , Index Price * 15% + OTM Amount ) + Mark Price of the Option - Order Price ] + Fee } * Order Volume
Buy to closeMaximum【 0 ,( Order Price + Transaction Fee )* Order Volume - Order Volume / Position Volume * Minimum ( Position Margin(Current Option) / Position Margin(All Positions) * Margin Balance , Position Margin(Current Option) ) 】
Sell to closeNone
OTM Amount of Call Option:Min ( Index Price - Strike Price, 0 )
OTM Amount of Put Option:Min ( Strike Price - Index Price, 0 )
Position Margin
When buying Options, the buyer pays the premium, so they do not need to worry about position Margin.
Once the seller completes a Sell-to-open, the short position’s margin is used as the seller's position Margin.
Long PositionNone
Short Position{ Maximum [ Index Price * 10% , Index Price * 15% + OTM Amount ] + Mark Price of the option } * Position Volume
Reduce Margin
When a user's Margin Balance falls below the Reduce Margin, Auto Reduce is triggered.
Long PositionNone
Short Position{ Maximum [ Index Price * 5% , Index Price * 7.5% + OTM Amount ] + Mark Price of the option + Index Price * (Transaction Fee Rate + 0.5%)} * Position Volume
Maintenance Margin
Maintenance Margin is the Margin 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.
Long PositionNone
Short Position{ Maximum [ Index Price * 1.3% , Index Price * 2% + OTM Amount ] + Index Price * (Trasaction Fee Rate + 0.5%)} * Position Amount

Exercising Options

Exercising Options is also referred to as the Options 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 Options Seller is obligated to cooperate with the Buyer should they decide to exercise that right.
Binance Options uses cash settlement. For Options Buyers, if profit is >0 after they exercise an Options, settlement automatically occurs once the Options is exercised. If profit from exercising the options is < 0, the Options are 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 Options
Buyer: If profit is > 0, the Options is automatically exercised, the fee to exercise is deducted, and the Buyer receives USDT.
Seller: Cooperates with the Buyer to exercise the Options. The Buyer's profit is deducted, and the remaining Margin is returned.
  1. Put Options
Buyer: If profit is < 0, the right to exercise the Options is given up.
Seller: All Margin is returned.
  1. The final stipulated price is < Strike price
  2. Call Options
Buyer: If profit is < 0, the right to exercise the Options is given up.
Seller: This does not apply.
  1. Put Options
Buyer: If profit is > 0, the Options is automatically exercised, the fee to exercise is deducted, and the Buyer receives USDT.
Seller: Cooperates with the Buyer to exercise the Options. The Buyer's profit is deducted, and the remaining Margin is returned.

Spot Index

In order to increase the Seller's ability to use their margin, Binance Options does not require Sellers to provide 100% margin. Options Sellers may not have enough margin 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 come from the cost of opening an Options position and the calculation of the Mark Price. The Options 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 Options Spot Price Index used by
Binance is the 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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