What are Options Contracts?
(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 Options (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 Options is obligated to match the Buyer.
Call Options: You can buy a certain quantity of a certain commodity at a certain price within a certain period of time in the future.
Put Options: 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
|Underlying Asset||The security that you agree to buy or sell as stipulated by the Options Contract. The underlying asset of a BTC/USDT options 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.|
|Options Direction||Call Options vs. Put Options.|
|European Options||At the exercise time, the Options Holder can choose whether to exercise their right to buy or sell.|
|American Options||The Options Holder can choose to exercise the options at any time up to the exercise time.|
|Premium||This is the amount paid by the Options Buyer to buy the Options Contract.|
|Exercise||The process by which the Options Buyer chooses to execute their right.|
Based on the relationship between the Options 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.
Options Contract Direction
Strike price = S. Underlying asset (token) price = P.
Options Contract Classification
P > S
P < S
P = S
P > S
P < S
P = S
At the time of expiration, if Alice, the Options Holder, chooses to exercise the Options by selling to Bob:
Call Options: A certain amount of a certain commodity can be bought at a certain price at a certain time in the future.
Put Options: 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 Options. Therefore, there are two ways in which the Options can be exercised:
|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 Options Holder, so it is only beneficial for Alice to exercise the Options. 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 Options Contract grants the holder the right to buy or sell BTC/USDT at a price of $8000 in the future.
Alice buys an Options 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.
(a) If the price of BTC/USDT 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 Options only if she can make a profit. If the price of BTC/USDT falls to $7000 and Alice holds a Call Options with a strike price of $8000, then Alice would lose money if she chooses to exercise the Options. Therefore, she will choose to give up the Options 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 Options.
Vanilla Options Contract Details
All Binance Vanilla Options Contracts are priced and settled in USDT. This allows users to act as direct buyers or sellers when purchasing or issuing Options. Since Options Buyers can choose to exercise the Options at a later date, the Options Seller needs to freeze collaterals in the meantime. This ensures that the Options Buyer does not run into any problems when they go to exercise the Options.
For the Seller, profit comes from the cost of the Options. For example, if after buying an Options 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 options. The Options Seller would not need to pay any extra fees and the collateral will be returned to the seller.
Contract name: BTC-210326-19000-C
[Contract name interpretation]: "Underlying asset-expiration time-exercise price-type"
|Expiration Time||2021-03-26 16:00:00 (UTC+8, 16:00 is the set expiration time)|
|Options Style||C (Call Options), P (Put Options)|
[Other Options Contract Parameters]
|Contract Type||European Options|
|Minimum Contract Price||0.01 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 Options Sellers]
|Minimum Order Margin Ratio||10%|
|Order margin Ratio||15%|
- Binance Options Contract Analysis
- Due to the unequal nature of rights granted by options contracts, the person who chooses the right will always be the options buyer and the seller must honor their related obligations.
- In the process of completing an options transaction, only the buyer has to pay the premium. The options seller is responsible for supplying enough margin to ensure that the options can later be exercised without any problems.
- 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 Options Seller has to provide sufficient collateral. If not enough collateral is provided, the Options Seller will undergo forced liquidation and lose all of their collateral.
- As an Options Buyer, you can decide to give up the right granted by the Options, 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.
- Binance uses a transparent quoting method, so all users can participate in buying and selling Options and are free to quote prices.
- In regards to T-type Options, Binance offers a variety of Options 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.
- 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 counterparty liquidation and forced liquidation, thereby reducing the impact of users' positions on the market as much as possible.
- 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.