Options Trading 101 — AMA with Mao Jie, Senior Product Manager of CoinEx
A couple of days ago, Binance announced that it will wholly acquire the JEX exchange. One thing led to another, people in the circle have focused more on financial derivatives. As a laurel of financial derivatives, how will options trading create a new path? How to get started with options trading and what is the deep-seated fascination? Yesterday, we were fortunate to have invited Mao Jie, a senior product manager of CoinEx, to unveil the secrets of options trading for us!
First of all, Mao Jie introduced us to the status quo of options in the field of digital currency. The following is the original text:
I believe that everyone has noticed that recently, Binance acquired the options trading platform JEX. OKEx also announced that it will launch options trading in the near future. In fact, when other competitors began to notice the options market, CoinEx laid out its plans early in the options trading, and launched a fully self-developed Options Trading System in July. We are very happy that more trading platforms have begun to attach importance to the derivatives market, and joined the options game, together to scale up the whole business.
These days many users have asked why CoinEx wants to develop such a niche derivative product. In fact, options trading is popular. In traditional finance, there is already a mature market. Viewing from the world, its market volume is almost the same as the one of futures trading. However, it is still immature in the field of digital currency, so it’s not received well by the public, but on the other hand it means more opportunities for the early players, whether it is an investor or a platform. There are more possibilities for success.
In addition to the options, CoinEx will also launch its own self-developed perpetual contract this month, taking the lead in completing the full layout of the spot, margin and options, futures, perpetual contracts and other mainstream financial derivatives, and will not rule out the possibility of developing other more refined derivatives in the future, such as bonds, graded funds, etc., providing users with complete and improved trading services.
Let’s switch the topic back to priority of the product we are sharing — options. From an open market, we now have BTCUSDT options and CKBUSDT options. BTCUSDT has both call and put options, but for CKBUSDT only put options are available at this moment. New markets will be opened in due course according to the market environment.
Functionally, CoinEx options are still in version 1.0. Currently, the two core functions of options — trading and issuance are supported, and some innovations have been made on the issuer’s margin system, for example, some contracts support a non-100% margin system. Users can buy options on our platform. If you are familiar with the options business and have certain risk control capabilities, you can also try to issue options. In the future, further updates will be made on some of the refined features, so as to satisfy various demands of investor. For example, professional investors need a series of high-level reference indicator. We will continue to maintain our current leading position at the product level.
Next, Mr. Mao gave answers to questions that users are more concerned about.
Q1: When the the market of options trading is too volatile, will the seller be put in the risk of forced liquidation? And what happens if the seller can’t exercise their options?
A: At present, options are issued in two ways in CoinEx. Take BTCUSDT as an example. One is 100% margin. The call option margin uses the transaction currency, which is BTC. When the option is exercised, the BTC is used for delivery. The put option uses USDT as quote currency for margin, and for delivery when exercised. dIn this case, the issuer has no risk of exploding, and there is no problem that the seller cannot exercise.
The other is non-100% margin. In this case, we have set a settlement price limit, and the most income at most is equal to the margin of the issuing party. Therefore, the situation where the seller cannot exercise their options doesn’t exist.
Q2: Were the codes of options trading completely finished by CoinEx? Were they done by the boss Haipo Yang personally?
A: We finished all of the codes by ourselves.
Q3: If there is a limit on the settlement price, does it mean that the buyer’s income is limited in another way?
A: Theoretically, it’s true, but in fact, it should based on the situation. For example, for an option of 50% margin rate, the maximum settlement price of BTCUSDT can reach 24,000 when the strike price is only 12,000. For most cases, there isn’t a huge difference.
Q4: Do you need to hold CKB to exercise the options of CKBUSDT?
A: No, CKB options trading is completely independent of the CKB spot trading, and you only need to hold a CKB option when exercising it.
Q5: Options purchase a future exercisable right. Mao Jie, how do you judge the quality of issued options on the market and determine which one is worth buying?
A: This involves a specific trading strategy, and I will not give specific investment advice, but I can tell you a bit about the theory. The price of the option is related to the underlying asset, the strike price, and the time from the expiration date. In future, more high-level indexes and parameters needed for the transaction will be added, and then some relevant instructions and explanations that help you understand will also be included.
Q6: What advantages do CoinEx’s derivatives have over the JEX derivatives that Binance just acquired?
A: It’s not really good for us to comment on another trading platform. Simply speaking, CoinEx has opened up a lot of exercise days and many choices of exercise prices. I believe that more professional investors should understand the essential of it, because many combined investment strategies require different exercise days and multiple exercise prices.
Q7: How to use the option to profit in the bull market, bear market, and monkey market?
A: The scope of this topic is relatively large. To put it simple and easy, in the bull market you should buy call options, and in the bear market you should buy put options. For the monkey market, as far as I understand, that is the time when large fluctuations occur. In this case, you can either hold the option since if the volatility gets bigger, the price of the option will also rise, or you can also do some combination strategies such as buying call options and put options at the same time. I won’t go into details.
Q8: I have learned before that options can use volatility to hedge against the price difference and profit. I always think this is difficult to understand. Can you explain it?
A: This question is a bit strange. I guess this user wants to ask the relationship between the volatility and the option price. The price of the option is related to the underlying asset price, volatility, strike price, and the time from the exercise date. Strictly speaking, there is another factor, being the borrowing rate of the underlying asset, but the impact is small and ignorable. In terms of volatility, the volatility is greater, the higher the value of the option. For example, if you expect a drastic fluctuation in the future price of BTCUSDT, then you can buy BTCUSDT options because the option price will rise.
Q9: Have you considered how to attract large players to be the issuers? For example, the price of a three-month call option is about 10 to 20% higher than the current price. It can’t be an insane price, so there will be retail investors to buy options?
A: This user has some misunderstanding about the pricing of the option. The option selling price is determined by the option holder (seller). After the issuer issues an option, they can place an order at an appropriate price they like on the trading page, and it’s the same as coin exchange.
Q10: Currently, there is always a blank in the trading section. After you buy an option, you have to go to all the way through it, and you can’t close the position in the middle. Today I tried to close the position when the slippage is enlarging but it failed, and under this circumstance so buyers lose a profit-making way and cannot stop loss when a wrong prediction on the market is made. What following measures will the platform take to improve this situation?
A: This question is related to the depth of market. As of this moment, it hasn’t been a long time since our options trading went online, and it will take a while to educate the users about options. That’s why temporarily the depth of market it not satisfactory. Subsequently, we will have a series of operational strategies, and we will collaborate with powerful market makers, together to solve this problem step by step.
Q11: When comparing the options of digital currency to traditional financial markets, such as high-leverage trading of gold and crude oil, what the advantages?
A: This difference is quite large. For instance, high-leverage trading of gold and crude oil can be regarded as spot margin trading, and there exists a mechanism of forced liquidation. Or you can say it somewhat like perpetual contact. When it comes to advantages, there are quite some, for example, you will never face a forced liquidation.
Q12: Why is the call option settled in BTC, and the put option in USDT? What are taken into account for such a design? And why is the margin ratio set at 100% and 50%, and why there is a limit on the maximum profit and loss?
A: This is actually intended to solve the problem that due to the seller’s default the option cannot be exercised on the exercise date. You can simply think that for the BTCUSDT call option, the seller’s risk comes from the unlimited rise of BTC price. If the margin is BTC, does the problem still exist? In traditional options trading, there is a concept named Covered Call. People who are interested can learn more about it and the principle applies similarly here. The settlement method of the put option is USDT, and the principle can be analogized.
The 50% that I just said is just an example. In fact, there are several margin ratios. The maximum profit and loss also aim to solve the problem that the same problem. I have answered a similar question before, you can check it for reference.
Q 13: For CKB options trading, if I have 10,000, the exercise price is 0.01USD, and the spot price is 0.009 on the day of exercise, then the difference is 0.001. After the delivery, what I receive will be USD?
A: Exercise Revenue = 0.001 * 10000 = 10 USDT. To understand the specific algorithm, go to our Support Center for reference.
This is the end of the sharing. See you next time!
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