Editor's Note: This article is from OKEx Research, and Odaily is authorized to reprint it.
1. Options trading
When trading options for the first time, many ordinary investors will feel uncomfortable, because in the options market, the option price (premium) reflects the price of "rights" rather than the price of digital assets. For example, when doing bitcoin quarterly contract trading, the delivery contract price reflects the price of bitcoin in the next quarter; while in option trading, the option price reflects the price of "this right".
There are many factors that affect the option price, such as the current price S of the underlying asset, the execution price K, the maturity date T, the price volatility, the risk-free interest rate r, etc. Professional financial analysts will use these factors, through the binary tree model or The Black-Suckers-Morton model is used to price options, which involves advanced mathematical knowledge such as Monte Carlo simulation, Wiener process, and Ito lemma. In the future, I will have the opportunity to make a special topic to introduce these parts to you. I will not do it here. Details.
In the same way that the contract market works, there are two ways to close a position in the options market:
At present, most of the positions in the options market are closed by liquidation. When an option is being traded, if any party to the transaction does not cancel its existing transaction, then the total open interest in the market will be increased by 1; if one party cancels the existing position , and the other party does not cancel its position, the total market open interest remains unchanged; if both investors cancel their positions, then the total market open interest decreases by 1.
2. Margin
In the delivery contract market, we often refer to the concept of margin. The purpose of margin is to ensure that the party providing the margin can perform the contract. However, in the option market, the margin of the option is only collected from the seller, not from both the buyer and the seller in the contract market.
This asymmetry of margin payment just reflects the asymmetry of rights and obligations in options. The option buyer buys "rights" instead of "obligations", and the option premium paid by the buyer is removed from the account at the beginning of the transaction , there is no risk of default, and this transaction will not become a liability of the buyer in the future. However, if the investor chooses to sell the option, margin will be required due to the liability incurred when the option is exercised in the future.
The design of the margin is a difficult point for the digital asset options trading platform. If the maintenance margin and liquidation mechanism similar to the contract market are adopted, the complexity of the options trading system will be greatly increased.
Therefore, most platforms currently adopt a fixed margin system design, which requires a fixed amount of margin to be paid for each option contract. The advantage of this design is that it reduces the complexity of the system, but it is extremely unfair to option sellers. Because in order to prevent breach of contract, it is often required to pay a huge amount of margin, which is far greater than the option fee that the seller can collect, which increases the transaction cost of the seller, dampens the enthusiasm of the seller, and ultimately reduces the transaction volume of the contract market. However, according to the latest news received, the option products that OKEx will launch soon will adopt a maintenance margin system similar to that of the contract market.
3. Options Leverage
Many users are often confused when trading options. Unlike the contract market, they do not see leverage settings in the options market, so where is the high leverage of options reflected?
To understand this issue, we first need to understand what leverage is.
In the contract market, leverage is the ratio of the actual value represented by the contract to the amount of cash paid to establish the position. Taking the Bitcoin quarterly contract market as an example, when we determine the leverage of the quarterly contract, we are actually determining the amount of cash (that is, the margin) paid to establish the contract position. For example, when the price of bitcoin is $7,000, investor A invests $7,000 and buys 800 USDT cash contracts with a par value of 0.01 BTC with 8 times leverage. At this time, the margin of the contract is $7,000, then
Leverage ratio = number of contracts * contract face value * bitcoin price / margin = 800*0.01*7000/7000=8
Therefore, from a cost perspective,
From the perspective of cost leverage, it reflects that every $1 option can buy $XXX worth of Bitcoin price index. However, some readers who have experience in option trading may find that the cost leverage ratio does not truly reflect the real leverage of the option.
Now, let's experience the leverage effect of options intuitively. As shown in the table below, there is now an option contract with an exercise price of $7,500, a contract multiplier of 0.1, and a period of one month. The current market price of Bitcoin is $7,000. The table shows the changes in options and Bitcoin prices over the three periods, and the numbers in parentheses represent the increase in Bitcoin prices and option prices.
From the above table, we can see that the cost leverage ratio of the option will change with the price of Bitcoin and the price of the option. Why does the above situation occur? Because the relationship between option returns and underlying asset prices is nonlinear.
From the perspective of yield, leverage refers to how much the price of derivatives can change when the price of the underlying asset changes by 1%.
In the delivery contract market,
Profit = (latest price - buying price) * number of contracts * contract face value = (latest price - buying price) * leverage * margin
The underlined variables in the above formula represent fixed variables. Therefore, from the perspective of income, the income change of the delivery contract is only linearly related to the market price, and the leverage of the delivery contract is fixed.
In the option market, when we close out the position, the option profit = (the latest price of the option – the purchase price of the option) * the number of options
Although we know that at the time of option delivery settlement:
Delivery income = number of option contracts * (underlying asset price - execution price) * contract multiplier - option premium
In "Introduction to Options (2)---Options VS Delivery Contracts", we mentioned that the price of an option is not only related to the return (SK) at the time of delivery, but also related to the option period, volatility and other factors. Therefore, the actual return of the option is not linearly related to the price of the underlying asset, so the actual return of the option will change with the changes in the price of the option and the underlying asset, and the leverage of the option is constantly changing.
From a yield point of view,
Among them, the option price change/futures price change is represented by the Greek value Delta, that is
It can be seen from the above that because the cost leverage ratio is fixed, the real leverage ratio of the option is actually related to the Greek value Delta. The study of option leverage is actually the study of Delta, and the analysis of Delta involves the BS pricing model, so here Without further discussion, we will make a special topic on the Greek value of options in the future.
