1. What is an Option?
An Option is a type of financial derivative contract that gives the buyer the right, but not the obligation, to buy or sell a certain amount of an underlying asset at a predetermined price during a specific time period. To obtain this right, the buyer must pay a certain premium to the seller in order to have the option to either buy (call option) or sell (put option) the underlying asset. If the buyer exercises the option and it is favorable, they can receive income through the exercise, while the seller is obligated to fulfill the corresponding expenditure. If the option is not exercised, the buyer can choose not to exercise it, and the seller is not obligated to fulfill the corresponding expenditure.
Before starting to trade, you need to understand some key elements of options:
Underlying Asset: The asset agreed upon in the derivative contract for buying and selling, which can be commodities, financial assets, interest rates, foreign exchange, composite price indices, etc.
Premium: The price for buying or selling the option.
Expiration Date: The time when the option contract expires, and the option will be invalid after the expiration date. For Coin Call, both the buyer and seller of the option can choose to close out their positions before the expiration date or hold the option until the expiration date for the exercise.
Strike Price: The price at which the option holder can buy (call option) or sell (put option) the underlying asset when exercising the option.
Settlement Price: The price of the underlying asset at the time of option expiration.
Contract Type: Different types of options contracts can be distinguished based on different criteria.
a) According to the exercise method, options can be divided into European options, American options, and other options.
European options: The buyer can only exercise the option on the expiration date (Coincall's option contract is a European option);
American options: The buyer can exercise the option on any day before the expiration date;
Other options: Options with exercise times are different from European and American options, such as Bermuda options.
b) According to the direction of the buying and selling rights granted, options can be divided into call options and put options. Buying a call option gives the holder the right to purchase the underlying asset at a predetermined price during a certain time period, without necessarily exercising that right. Similarly, buying a put option gives the holder the right to sell the underlying asset.
c) According to the relationship between the exercise price and the underlying price, options can be divided into in-the-money options, at-the-money options, and out-of-the-money options.
|Type of Contract||Features||Moneyness|
|Call Option||exercise price > settlement Price||out-of-the-money options|
|exercise price = settlement Price||at-the-money options|
|exercise price < settlement Price||in-the-money options|
|Put Option||exercise price > settlement Price||in-the-money options|
|exercise price = settlement Price||at-the-money options|
|exercise price < settlement Price||out-of-the-money options|
2. Coincall's Option Contracts
Coincall offers European-style cash-settled Options
European-style options on the Coincall platform cannot be exercised prior to expiration and can only be exercised on the day of expiration. Coincall options are automatically exercised at option expiration.
They are cash settled, which means that no actual delivery of the underlying asset is required at the time of settlement of the option, and the return on the option is determined by the difference between the Final Settlement Price and the Exercise Price. The final settlement price is calculated using the arithmetic average of the price of the underlying index 30 minutes prior to the expiration of the option.
Both buyers and sellers can close out their positions early before the expiration of the option contract to earn the premium spread.
Coincall Options Contract Details
|Contract Types||BTC Options (Calls and Puts)||ETH Options (Calls and Puts)|
|Contract Underlying||BTC/USD Index||ETH/USD Index|
|Contract Expiry||current day, next day, third day, current week, next week, third week, current month, next month, third month, quarter, next quarter, third quarter, and fourth quarter||current day, next day, third day, current week, next week, third week, current month, next month, third month, quarter, next quarter, third quarter, and fourth quarter|
|Minimum Trading Unit||0.01 BTC||0.1 ETH|
|Quoting Unit||Quoting at USD price of 1 BTC||Quoting at USD price of 1 ETH|
|Minimum Price Change||0.1 USD||0.01 USD|
|Trading Hours||7*24 hours||7*24 hours|
|Expiration time||Expiration date at 08:00 UTC||Expiration date at 08:00 UTC|
|Markups||The platform uses the B-S model to determine and update in real-time||The platform uses the B-S model to determine and update in real-time|
|Trading fee rate||here||here|
|Exercise fee rate||0.015%, no exercise fee for dated options||0.015%, no exercise fee for dated options|
|Exercise method||European style options, automatic exercise settlement at expiration||European style options, automatic exercise settlement at expiration|
|Contract Naming Rules||Named after "Underlying Asset - Expiration Date - Strike Price - Option Type (C-Call/P-Put)"||Named after "Underlying Asset - Expiration Date - Strike Price - Option Type (C-Call/P-Put)"|
Example: BTC-31MAR23-40000-C means a call option on BTC expiring on March 31, 2023, with a strike price of 40,000 USD
3. Coincall Options Contract vs Futures Contract
Coincall options contracts and futures contracts are both standardized contracts, the main differences between them are as follows.
a) The rights and obligations of buyers and sellers are different
An option contract is one-way in that the buyer of the option acquires the contracted rights after paying the premium and does not have to assume the obligations, while the seller of the option receives the rights and passively assumes the obligations. The futures contract is two-way, both parties have to bear the obligation to deliver the futures contract at maturity.
b) Different risks are borne by buyers and sellers
In an option transaction, the buyer's biggest loss is the paid premium and does not need to pay the performance margin. The seller, on the other hand, is exposed to greater risk, may even lose an unlimited amount, and must pay a margin as a guarantee to fulfill its obligations. In futures trading, both buyers and sellers of futures contracts are required to pay a certain percentage of the margin.
c) Different profit and loss characteristics
The buyer's gain of an option contract fluctuates with market changes, but the maximum loss is only the premium paid; while the seller's gain is only the premium paid for the option sold, and the loss is not fixed.
4. Example of Options Trading
Coincall options support four transaction types:
buy call options, buy put options, sell call options, and sell put options.
There is an existing option contract BTC-31MAR23-20000-C, a call option on BTC with a strike price of $20,000 expiring on March 31, 2023.
The current price of BTC is $18,000 and A thinks the price of BTC will increase by the end of March 2023, while B thinks it will decrease.
A buys 1 BTC of the above option and pays the premium of $1,000; B sells 1 BTC of the option and receives the premium of $1,000.
A, as the buyer of the call option, has the right to buy 1 BTC at $20,000 at the expiration of the contract, and B has the obligation to match the exercise of the option and sell 1 BTC at $20,000.
If the price of BTC is $22,000 at the expiration of the option, A exercises the option and gains $2,000, （22,000 -20,000）which is a net gain of $1,000 after deducting the $1,000 premium; correspondingly, B cooperates with the exercise and loses $2,000, which is a net loss of $1,000 after adding the $1,000 premium received $1,000.
If the option expires at a BTC price of $16,000, A will forfeit the option for a net loss of $1,000 in royalties; correspondingly, B will not be obligated, for a net gain of $1,000 in royalties.
If the option has not yet expired, the option premium becomes $2,000 at which point A has the option to sell the option for a premium spread of $1,000.
There is an existing option contract BTC-31MAR23-20,000-P, a put option on BTC with a strike price of $18,000 that expires on March 31, 2023.
The current price of BTC is $18,000 and A thinks the price of BTC will fall by the end of March 2023, while B thinks it will rise.
A buys 1 BTC of the above option and pays a premium of $4,000; B sells 1 BTC of the option and receives a premium of $4,000.
As a put buyer, A has the right to sell 1 BTC at $20,000 at expiration, and B has the obligation to buy 1 BTC at $20,000 in conjunction with the exercise of the option.
If the option expires with BTC at $15,000, A exercises the option and gains $5,000 (20,000 - 15,000) which is a net gain of $1,000 after the $4,000 premium; correspondingly, B cooperates with the exercise and loses $5,000, which is a net loss of $1,000 after the $4,000 premium received. The net loss is $1,000.
If the option expires at a BTC price of $22,000, A will forfeit the option for a net loss of $4,000; correspondingly, B will not be obligated, for a net gain of $4,000 in royalties.
If the option has not yet expired, the option premium becomes $5,000, at which point A has the option to sell the option for a premium spread of $1,000.