Produced | Odaily (ID: o-daily)
Produced | Odaily (ID: o-daily)
Recently, cryptocurrency derivatives options trading is becoming a "new must-have" for mainstream exchanges.
On December 9th, Bakkt launched Bitcoin options trading, with a trading volume of more than 200 BTC on the first day; on December 12th, OKEx launched options simulation trading, and the official version launch time is unknown; in the first quarter of 2020, the Chicago Mercantile Exchange (CME ) will also launch Bitcoin options.
Many popular sciences on the market claim that options are "futures without liquidation", saying that they have "limited losses and unlimited gains".
Of course, the actual situation is not so simple and beautiful. Although the option risk is small on the surface, its rules are more complicated, which discourages many traders.
"If you play contracts and lose money in one month, you at least understand the rules; if you play options and lose money in three months, you still haven't fully understood the rules." The investor teased.
So how exactly do you trade options? How to see the risk clearly and calculate the return?
In this article, Odaily will answer you one by one through simulated disk operation and examples in human terms. I believe that after reading this article carefully, everyone will have a clear introductory understanding of the trading rules of digital currency options.
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What are options?
Options (Options) is a right that can be exercised at a certain time in the future. After the buyer of the option pays a certain amount of option premium to the seller, he can obtain this right: buy or sell at a certain price in a certain time in the future Out of a certain amount of underlying assets, this is option trading.
Below, I will give an example to help you understand.
Below, I will give an example to help you understand.
Now the price of Bitcoin is 7,000 US dollars, and Leek Xiaoqin predicts that it will rise to 10,000 US dollars in a month. Since I only had $100 on hand, I felt that the profit from buying spot goods was too small, and I was afraid of losing money when I was doing long futures contracts, so I chose options trading.
Xiao Qin contacted Lao Wang and signed a contract, stipulating that he could buy one bitcoin at a price of $7,500 one month later. In order to prove that the contract is valid, Xiao Qin gave the seller $50 as a deposit.
One month later, the price of Bitcoin really reached 10,000 US dollars, and Xiao Qin could pay 7,500 US dollars to fulfill the contract, and then sell the bitcoins he got. After excluding the cost, Xiao Qin earned 10000-7500-50=2450 US dollars.
Another situation is that one month later, the price of Bitcoin is still 7,000 US dollars. If Xiao Qin executes the contract at this time, he will need to spend 7,500 US dollars (much higher than the market price) to buy 1 BTC, and he will definitely lose money. He can choose not to execute the contract, and all he loses is the deposit of $50.
Here, the three advantages of options are reflected: high yield, small loss and no "explosion".
Calculated according to the rate of return, Xiao Qin's rate of return is (2450-50)/50*100%=4800%. Even if the contract is not fulfilled, the final loss is only $50.
In addition, in the past month, even if Bitcoin first fell to $1,000 and then rebounded to $10,000, Xiao Qin's contract is still valid and will not "explode the position." But if it is Bitcoin futures, the position has already been liquidated when it falls below, and the subsequent rebound is meaningless to Xiao Qin. This is what many interpretations emphasize that options "will not blow up their positions".
In the above case, several concepts of options are actually involved:
The $7,500 agreed in the contract is called the "strike price" in options, and is generally represented by a capital letter K;
The deposit of $50 is also the cost of Xiaoqin, which is called "option fee" or "mark price", denoted by the lowercase letter f;
The duration of the contract is 1 month, known as the "due date" or "term", denoted by a capital letter T;
The actual price of the last BTC after one month is called the "delivery price" with a capital letter S;
In the end, Xiaoqin performed the contract, which is called "exercise" in options.
There are generally two types of option products: call options and put options. In the above case, what Xiao Qin bought was a call option. If Xiaoqin is bearish on the market for a long time, he needs to buy put options.
Reverse the above example, that is, Xiao Qin thinks that the price will fall to 5,000 US dollars, so he agrees with Lao Wang to buy a put option with a strike price of 6,000 US dollars, and the option premium is 50 US dollars. When the bitcoin falls to $5,000 after the expiration date, Xiao Qin’s income is $6,000-5,000-50=$950; if it does not fall below $6,000 at the expiration date, Xiao Qin can refrain from performing the contract, and the $50 will directly belong to Lao Wang.
In the previous call option case, I believe everyone has also discovered a problem: If Bitcoin rises to $10,000 in advance in the next month, can Xiao Qin fulfill the contract (exercise) in advance to prevent the price from falling?
There are two different types of options involved here: European options and American options.
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How to play options? (practical explanation)
After reading the previous story of Xiao Qin, I believe you have a preliminary understanding of options, so let's enter our practical chapter. In this session, we will combine OKEx's simulated trading and introduce several options trading strategies suitable for Xiaobai.
1. Buying options and exercising at maturity
If the user is bullish (bearish) on the future bitcoin price, he can choose to buy a call option (buy a put option) and exercise it at a certain point in the future. There are currently three types of options available: current week, next week, and quarterly.
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(call options for the week)
In fact, the final income of a user who buys a call option is: delivery price - strike price - option premium (mark price). The delivery price is uncertain. In order to maximize the profit, both the exercise price and the option premium should be as small as possible.
However, through observation, we found that the lower the strike price, the higher the option premium, which is difficult to balance at the same time.
This is because the option premium is affected by many factors, the main factors being the remaining exercise time and the spot price: the longer the remaining time, the higher the option premium; the smaller the difference between the spot price and the strike price, the higher the option premium.
For example: the current BTC price is $7,100. In the weekly call option, the option fee for the strike price of $7,500 is 0.0059 BTC, and the option fee for the strike price of $10,000 is 0.0001 BTC. But in the quarterly call option, the option premium for the $10,000 strike price is 0.0441 BTC.
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(quarterly call option)
Of course, high risks also correspond to possible high returns, and many people may also have the mentality of "small to big" when buying options.
Let's make a practical comparison. Suppose you buy a $10,000 BTC call option and a $7,500 BTC call option. If BTC really rises sharply, the returns of the two are as follows:
To sum up, when choosing options, we should comprehensively consider the input cost and the possibility of future rise.
Having said that, although the rate of return of "fighting big with small" is very high, the probability of loss is also higher, so it is still necessary to carefully control risks and invest rationally.
2. Buy options and sell them halfway
As we have said before, many options platforms including OKEx are European-style options, which must be exercised at a specific time.
Then the question arises again, do we have to wait until the exercise time or the price reaches a predetermined value to obtain income?
In fact, investors can profit by selling options in advance before the expiration date.
For example, Xiaoqin bought a $10,000 call option for the week, and the option premium he paid was 0.0001 BTC. In the next two days, Bitcoin rose to $8,000, and at this time, the option fee of the $10,000 call option for the week also rose to 0.003 BTC. At this time, Xiao Qin can sell the options in his hand to others in advance, and the yield is 2900%. Even if it does not rise to $10,000 later, it will still make a high profit; but if Xiao Qin keeps holding this option until the exercise time, and the price does not rise to $10,000, he will end up losing 0.0001 BTC instead.
This trading method is also a relatively common method in the options market, which can be compared to "closing positions" in futures trading.
3. As an option seller, you only earn option fees
The cases in the previous article are all carried out from the perspective of the buyer. In fact, options trading is similar to futures trading, and there are buyers and sellers, but there are four forms of options:
call option buyer
call option seller
put option buyer
put option seller
Whether it is a call option or a put option, the seller is an important guarantee object for option performance. The money earned by Xiao Qin in the previous article came from the margin provided by the seller to the exchange.
The seller's return is that no matter whether Xiao Qin exercises the option in the end, he can get the option fee paid by Xiao Qin.
In other words, the profit of the seller is limited, and only the option premium paid by the buyer is earned; if there is a loss, the seller has to bear the risk of forced liquidation of the entire margin.
So why would anyone want to be a seller?
Let's take a $10,000 call option for the week as an example. If Pharaoh chooses to be the seller, and the price does not rise to $10,000 in the end, Pharaoh will earn 0.0001 BTC; if Pharaoh trades with 100 people at the same time, the total income will be 0.01 BTC. Why did Lao Wang dare to do this, because Lao Wang thinks that the possibility of skyrocketing within a week is too small.
As an option seller, you also need to take into account risks and benefits. In a volatile market, the greater the deviation from the spot price, the smaller the risk.
"In trading, the profit-loss ratio is only a part, and the winning rate is also very important. The real market situation is that the seller's winning rate is very high, with an 80% winning rate. Because most of the time the market is sideways." Chuang Yu, OK Research Institute Tell Odaily.
4. Arbitrage based on option premiums
Options need to pay an option fee (marked price), and some people are eyeing this cake and relying on the option fee for arbitrage.
As mentioned above, the mark price is affected by the remaining exercise time and the spot price, and the exchange will also display the mark price, which can be regarded as a reasonable price.
But in fact, the marked price will also be affected by the market. When the spot price does not change, the mark price will deviate from the normal price when the option is overbought or oversold due to insufficient option depth. As shown below: the mark price is 0.0002 BTC, but the price of buy 1 and sell 1 is much higher than this price, overbought.
At this time, the seller can sell the option at the price of 0.0005 BTC, and then buy back the option he sold when the price finally returns to the normal level of 0.0002 BTC (equivalent to closing the position). Once back and forth, I made 150%.
Even if the price did not fall back in the end, since this is the current week's contract and the strike price is $9,500, the probability of Bitcoin rising from 7,100 to this level is not high, and the risk of loss is very small, but the option premium you earned has doubled more than double.
In the same way, when an oversold situation occurs, you can buy it first, and then sell it after the option price returns to the normal level to earn a profit.
It is worth noting that in an option market with sufficient depth, this situation generally rarely occurs, and if it occurs, it is a good arbitrage opportunity.
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And these option knowledge you need to know?
The previous article introduced several options trading methods, but in fact there are still some misunderstandings in options, you need to understand clearly before entering the market rationally.
First of all, many popular science articles claim that options are "limited losses, unlimited gains", investors need to be vigilant.
On the one hand, in option trading, the option buyer's single loss is indeed limited (loss of option premium), but if there are multiple trading mistakes, the loss is not uncommon. Similarly, the option income is not unlimited, and the income can of course be calculated.
On the other hand, the seller of the option transaction only earns the option premium, but suffers from the loss of the margin (that is, liquidation).
Secondly, there are voices saying: options can be used to lock in the rising profits after the halving of Bitcoin at a relatively small cost in advance. This statement is not rigorous.
In fact, for OKEx, JEX, and Deribit, which currently offer option trading, the longest option period is June 26 next year. But no one can guarantee that Bitcoin will skyrocket before this time comes. If you invest a huge amount of money, you may face losses, please pay attention to risk prevention.
Of course, with reference to the development of delivery contracts, there may be perpetual options in future option transactions. At that point, investors may be able to trade with confidence.
Furthermore, compared with spot and futures trading, option trading is not necessarily the highest income.
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(Picture from OKEx Research)
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When "purchase price < latest market price < option exercise price", the futures return is higher than the option, but the option has a premium loss; but if the price of Bitcoin keeps rising, the option return is much higher than the other two means .
When "purchase price < latest market price < option exercise price", the futures return is higher than the option, but the option has a premium loss; but if the price of Bitcoin keeps rising, the option return is much higher than the other two means .
Finally, there are currently very few options available. For example, OKEx and Deribit only have Bitcoin options, and JEX, which has more types, has five options: BTC, ETH, EOS, LTC, and BNB options. Options for other cryptocurrencies are currently in a vacant state.
Although the digital currency options market is still in its early stages, it is believed that with the improvement of the market and the popularization of investor education, it still has certain development prospects.
Finally, Odaily once again reminds investors that investment is risky and transactions must be cautious.
(Note: Thanks to OK Research Institute Chuang Yu)
Check information:
"Introduction to Digital Asset Options (1): What is Digital Asset Option"
"Introduction to Digital Asset Options (2): Options VS Delivery Contracts"
"What is the difference between a digital asset "option contract" and a "delivery contract"?" "
