Bitcoin Options beat records, and exchanges compete for this segment. We tell you what these tools are and how they work
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Bitcoin Options beat records, and exchanges compete for this segment. We tell you what these tools are and how they work
The cryptocurrency market is continuously developing, integrating with traditional and inheriting complex financial products, such as futures and options.
Some types of fixed-term contracts have already firmly settled in the Bitcoin industry. This is noticeable in the activity of traders on CME.
However, the situation with the options is somewhat different. These derivatives are difficult to understand among ordinary market participants and are not yet so popular.
Nevertheless, the demand for such tools is, as evidenced by the dynamics of the growth of this market segment and interest from platforms such as Binance and Bitfinex.
Bitcoin options are already presented on adjustable and oriented mainly on whales of CME, Ledgerx and Bakkt exchanges. Among the unregulated sites, the leader is Deribit, followed by FTX and OKEX.
FORKLOG magazine figured out what options are and what are the types of options. We will talk about the features of these tools and the current state of affairs in the segment. In this material you will also find comments on leading market experts on the role of options in the industry.
What are options and how they work?
Option – a financial contract concluded between the two parties – the holder and the seller. The first receives the right, but not an obligation, to buy or sell a certain number of basic asset at the price of execution (Strike-price) on a certain date (expiration date).
The seller undertakes to buy or sell the asset at the request of the holder of the option. The latter pays the seller at the time of purchase of the contract a certain amount of money – the so -called Prize.
The rights and obligations of the holder and the seller are significantly different. The first has the right to choose whether to execute an option or not. The seller is obliged to fulfill the terms of the contract at the request of the holder.
Parameters such as the type of basic asset, the date of expiration, a striking price are recorded at the time of the release of the contract, after which they cannot be changed.
Like futures, options – derivatives of financial instruments, derivatives. This means that they can be based on various basic assets (ba) – shares, indices or cryptocurrencies.
“Likely existing options in traditional finance for all the main assets, there are contracts on the basis of BTC and ETH in the cryptocurrency market. They are very interesting financial products “, – noted in a conversation with FORKLOG the head of Three Arrows Capital Su Zhu.
Options are used both for risk hedging and speculative trade. For example, a confident in the growth of the basic asset is a speculator buys a call-point. If the price of a BA rises above the fear, the trader can use its contract to buy an asset with a discount.
“Derivatives such as options allow users to hedge risks and receive income. In the traditional financial market, derivatives play a key role. These tools are needed so that the cryptocurrency market continues to grow and develop, filled with new participants. “, -said Binance Futures Vice President Aaron Gong.
Practical use of options
Consider the simplest hedging example using options. Suppose there is a manufacturer of tomato paste, sauces and ketchups. There is a farmer supplies to this company tomatoes. It acts in conditions of strict competition close to perfect.
It is extremely important for the company to buy cheaper raw materials in order to minimize the cost of products and remain in profit. The farmer, in turn, hopes for long -term cooperation with the company, so as not to lose a large client.
The company offers the farmer an option, which involves the right to buy 10 tons of tomato tomatoes next year at an relevant price for today – say, $ 1000 per ton per ton. To take advantage of this right, the company pays the Farmer a Prize in the option – 3% of the total transaction amount of $ 10,000, that is, $ 300. The farmer will have to sell the corresponding amount of goods at the above price at the request of the company and at a certain time.
A year later, the crop was high, which caused a decrease in the market value of tomatoes to $ 800 per ton. The company decides not to exercise its right to buy raw materials for $ 10,000, since other farmers can purchase the same 10 tons of tomatoes for only $ 8000.
Thus, having lost only $ 300 as an option in an option, the company is insured from price risk. Buying raw materials at a significantly lower market price with more than pays off the cost of an option contract.
Imagine another scenario: the crop turned out to be unimportant and the price of scarce tomatoes jumped up to $ 1200 per ton. Then the company will certainly take advantage of the right to purchase tomatoes for $ 1000. Thus, the benefit is obtained with any development of events.
It is easy to guess that options can be used by miners to hedge risks of adverse changes in the price of the extracted asset. For example, expecting a decrease in BTC prices, miners can use options that give the right to sell cryptocurrency in a cost above the breakthrough point.
“Miners are already very actively operating in the options markets. And probably remain activity “, – emphasized Su Zhu.
Su Zhu is sure that in the long run, the options will make a spoke market of cryptocurrencies liquid more and more attractive for a wide circle of participants. He added that the growth of the popularity of such contracts among miners can significantly reduce the pressure of sales.
“Options give miners the opportunity to fix the price of coins obtained in the future. Miners can better manage their production costs and protect themselves from market volatility. “, – emphasized Aaron Gong, expressing confidence that the popularity of options will continue to grow.
According to him, such tools open up new opportunities and can be interesting to speculators, funds and long -term cryptocurrency holders.
“Institutional investors also demonstrate a growing interest in options and other derivatives. Last week it was reported that the famous trader with Wall Street Paul Tudor Jones allocated several percent from his Tudor BVI Foundation for Bitcoin Figures. This is a positive signal that means that more and more institutionals are interested in the cryptocurrency market “, – added the gong.
However, optional strategies are not suitable for every market participant – for effective work with these tools, a certain experience is needed, the co -founder of Coinindex is sure.Agency Julia Spores:
“Of course, in order to effectively use this, the miner must have an experienced trader (optional strategies are one of the most difficult in the market) – or they will have to unite and work through specialized trading companies. This market exists, although it is not for the general public “.
Also, according to her, options can be interesting to funds and retail traders who have filled their hand in speculative trade.
“Options are independent and good speculative tools. And if you have positions on futures or on a spot market, it’s just time to study new opportunities ”, – added Julia Sporash.
Types of options
There are two main types of options – Option-Coll and Option-Put. The first gives the right to the holder of the contract to acquire a certain number of basic asset from the seller (they also say – the inscription, Writer) at the price of execution for a certain date in the future. It is this type of option that was used in the example with tomatoes.
Collow-Open profitability schedule, depending on changes in the price of the basic asset. Strike-price = 100, an option for option = 10. Source: Wikipedia
Option-Put, on the contrary, gives the right to buy a contract to sell a basic asset at a fixed price. The latter can be higher than the market at the time of expiration, which is beneficial to the trader.
Put-Open profitability schedule, depending on changes in the market price of the basic asset. Strike – 100, award – 10.
Market participants use calls, predicting the increase in the price of BA, and Put – waiting for its reduction. More complex strategies use combinations of these two types of contracts.
There is still a term “Covered option”. For example, an option-cell is coated if the seller has the corresponding terms of the https://gagarin.news/ru/news/shiba-inu-will-switch-to-its-own-blockchain-this-year/ contract with the number of basic asset.
Options may also differ in style of performance – American or European.
Options European style invite the execution by the holder of the contract exclusively on the date of expiration. Such options, in particular, are presented at Cme and Bakkt.
American style implies the possibility of execution of the contract at any time before the date of expiration. Options of both styles are traded around the world, their names have nothing to do with geographical binding.
There are less standardized, exotic options. However, the popularity and significance of such tools in the financial market is not so much great.
The parameters and conditions of trade in certain options are described in specifications To them, where the expiration period, airsick price and other elements of the contract are indicated.
Below is the screenshot of the page of the Bitcoin-opticals of the OKEX exchange:
Data for 12.05.2020
Green frame The main parameters of the option – a pair of Bitcoin/US dollar; “20200515” – date of expiration of the contract – May 15, 2020. 9000-Asset Stores used to compare with the base. “C” means CALL, that is, Coll-Option. In the case of “p” it would be a put-point.
AT yellow frame Important optional metrics:
- “Index (USD)” – a spot index affecting the price of the option; This is the marker price used by the exchange for calculating the base rate of bitcoin and which should be focused on the investor;
- “Market price (BTC)” calculated by the algorithm of the platform in real time; so to speak, “fair” price of options.
Blue frame the usual exchange glass familiar to any trader. Red color shows sales prices, green – purchase prices, and on the right – the number of contracts.
OKEX presents European style options with a minimum order of the order 0.1 (the same as the leader of the segment – Deribit). Detailed specifications can be studied here.
Prize, Strike Price and Option Monetary
Option Prize is a cash amount paid by the buyer to the seller. The prize is equal to the value of the contract and, in fact, is a fee for the risk of adverse changes in the value of the basic asset.
The option of the option is formed by two components:
- Internal cost – the amount that the buyer would receive in the execution of the contract at the moment. It depends on the ratio of the price of the basic asset and the fear.
- Temporary cost – depends on the time remaining to the expiration. Usually, the less time before executing the contract – the lower the size of the premium.
As a rule, high price volatility contributes to the growth of the bonus, and vice versa. The transaction with a close aspen price with respect to the current one has much greater chances of closing in profit and, therefore, the premium for such an option will be relatively high.
The table below illustrates the influence of various factors on the amount of the option in the option:
Strike-price or The price of execution -The cost recorded in the option, at which the buyer of the call-Open maybe Buy (or sell, if it is a plate point) the basic asset. In turn, the contract seller must Sell or buy ba.
Cash – an indicator of the ability to receive funds from the exercise of the right to fulfill the derivative. In the context of options, you can calculate the money by comparing the BA’s SPT CCE and the Strike Process of the Option. Thus, three options are possible:
- option “In money”: in the case of a knee – if the spawning price is higher than the aspect (then the internal cost of the contract is positive), in the case of Put, on the contrary, if the price is below the fear;
- option “On money” (or “with their own”) – the equality of the fear with current exchange quotes, the internal cost is 0;
- option “Out of money” (“Without money”) – the execution of the option is economically impractical; In such a situation, the current price of the basic asset is below the Strack-Collow-Options or, conversely, the spare price of the BA above the fear in the case of Put.
The table below demonstrates options for evaluating coll- and plate opticals from the point of view of cash.
Thus, when the option is expected, its cost “outside of money” will be 0. The cost of the contract “in money” will correspond to the difference between the striking price and the price of the BA or the so-called internal value of the option.
There are many options for trading options. Four basic approaches can be distinguished.
Long call -Buying a call-optic, the investor counts on an increase in the price of the basic asset above the fear on the date of expiration of the contract. Then he will be able to buy an asset with a discount to the market price and thus earn on the difference. If the price drops below the fear, the buyer risks only the premium paid for the option.
Long Pout – A kind of alternative to a short position in the spot market. The buyer of the Put-Option hopes to earn, assuming that the price of BA will drop below the fear at the time of expiration. With this scenario, the investor can sell an asset at a higher market price.
Also, through the Put-Open, the investor can limit the risk of falling the price of the asset, at which a long position is opened. According to Su Zhu, miners can use the strategy of “protective trips”, in the activities of which the prolonged cryptocurrency price is undesirable and prolonged to drop in the price of the price. Through such tools, miners can provide profitable or at least break -in activities.
Short call. The investor acts as a seller of a contract, counting on a reduction in the price of a BAs below the fear on the expiration date. However, the higher the price of the asset, the more losses the inscription carries. Thus, the risk of the contractor of the contract is unlimited, and the profit potential is limited by the prize from the sale of the coll.
Short put. The seller of such an option counts on the award for it, being firmly sure that the price of a BA will be higher than a fear.
Combinations of these basic strategies can underlie more complex approaches to the trade in options, such as:
- Protective Put -purchase of a put off board for the existing asset;
- covered (wealthy) call -the investor sells a call-optical for already available to him or which will be purchased simultaneously with the sale of the option; The strategy reduces the risk of owning an asset, since the fall of its price is partially compensated by the prize;
- Straddl -a kind of betting on volatility, which involves the purchase of a call and a plate point for the same asset with the same expiration period and the same striking price;
- Strelng -Almost the same as Steddle, differs only in different striking centers.
The current state of the cryptocurrency options market
The total open interest (OI) by Bitcoin-Opziors by the end of April 2020 reached a historical maximum-$ 800 million, and in May exceeded this mark.
Deribit dominates this market segment – it accounts for almost 85% of OI. This exchange is followed by an OKEX and adjustable Ledgerx. The share of Bakkt in the market is insignificant.
Data: SKEW as of 12.05.2020
May 8 OI on Deribit exceeded $ 1 billion.
>1 Billion BTC Options OI
Record High OI in BTC Options for the Entire Market, 84% HELD at Deribit
Source: @skewdotcom pic.Twitter.COM/ST3OYMO8CB
– Deribit (@deribitexchange) May 8, 2020
The volume of trading on Deribit exceeds the OKEX indicator by more than 10 times:
Data: SKEW as of 12.05.2020.
The next screenshot illustrates that the deribit is dominated by the options, and the highest OI-according to contracts with expiration on May 29 according to the Strack-price $ 7000. This type of option is likely to be popular among hedgers who allow the return of the BTC price to lower marks.
Data: SKEW as of 12.05.2020
Much less OI indicator in calls with a strip of $ 12,000 and expiration on June 26.
Bitfinex in the first quarter planned to offer the market options. The launch of these fixed -term contracts at the beginning of last year considered the cryptoderivative BitMex platform.
According to Su Zhu, the successful exit of exchanges to this market is not such a simple task. Simple derivatives are presented on the above platforms, but options are already a completely different level.
“The main difference between options and, say, unlimited contracts or a spot is a much higher technological requirements for the exchange, which must be fulfilled by such orders. Here one or two will not work out “, – the expert shared my opinion.
In April, simplified short -term options with the American style of performance appeared on Binance. Only the exchange can act as the inscription on these tools, but not the user. The latter only the role of the buyer is allotted.
When asked if Binance can take a significant market share in the foreseeable future, Zhu answered the following:
“I think their options are unconditionally oriented towards retail traders using mobile applications. Deribit – more for advanced market participants “.
Thus, so far Deribit is almost a monopolist of the Bitcoin Option market. However, it will be interesting to observe whether Binance will be able to win any significant share in the segment over time.
Options – complex financial instruments, their mechanism of work is unlikely to develop most beginner traders immediately. Nevertheless, these derivatives may seem interesting to experienced market participants and, in particular, miners.
The following advantages and disadvantages of options can be distinguished. From advantages We note these contracts:
– flexibility of use in speculative trade;
– the possibility of using many combinations and trade strategies;
– good tool for hedging risks;
– the ability to use in any trend – ascending, descending, sidewall.
– the complexity of understanding the mechanism of work, especially for beginner market participants;
– asymmetric conditions and, accordingly, risks for the buyer and seller;
– the complexity of trade strategies;
– the volatility of the bonus in the option, which depends on the proximity of the expiration period and the dynamics of prices in the spot market;
– low liquidity.
Different participants in the industry are different about options based on cryptocurrencies. Some consider them promising tools useful for miners, funds, retail traders and the market as a whole. Others are convinced that such derivatives are archaism.
Nevertheless, options are gradually taking root in the cryptocurrency market. This can be seen in the dynamics of the volume of bidding and open interest. In addition, more and more exchanges are striving to add support for these contracts, which contributes to the growth of competition and further development of the industry.
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