Major crypto exchange Binance claims to have become the largest options venue in the cryptocurrency market, having hit $295 million in traded volume as of April 20.
In an interview with Cointelegraph on April 23, the vice president of Binance Futures, Aaron Gong, said that the platform had overtaken its counterparts by daily traded volume on April 14 — just one day after its official launch.
Gong explained that the contract had been designed to tackle what Binance perceived to be the key drawbacks of existing crypto options products — low liquidity, high premiums and large spread.
An options contract offers traders the chance to purchase either a right to buy (a “call option”) or sell (a “put option”) on a given asset at a specified “strike price.”
Gong noted that existing crypto options on the market typically offer a wide range of expiration dates and strike prices, including long-term durations that can extend up to 100 days and even longer. He said:
“This market structure creates a fragmented liquidity landscape, where contracts that are far out-of-the-money and furthest away from the expiration date are notoriously illiquid. As such, trading with those contracts may pose challenges to transaction costs and trade execution.”
Binance’s Bitcoin (BTC)/Tether (USDT) options contracts are designed to offer a shorter time-frame, ranging from 10 minutes to one day. Moreover, Binance itself is the primary liquidity provider of the product, meaning that the options have an uncapped supply and users will have quotations at any given time.
Gong said that the contract is a simplified version of traditional options and is catered to retail users specifically, with the aim of lowering barriers to entry for derivatives trading.
The exchange has chosen to offer the American, as opposed to the European, version of options, in which traders can settle the contract at the chosen strike price at any time before — and including — the expiry date itself.
Gong gave a concrete example of how an options contract works, outlining that:
“If a buyer buys a Binance Call option with a strike price of $7,000 and a premium of $100, the breakeven price will be $7,100 - the sum of the strike price and premium. To exit the trade profitably, the underlying asset should move beyond $7,100 [...] Conversely, if the underlying asset fails to move beyond the breakeven price at expiry, the option will expire worthless.”
He noted that, in this example, if the price of the underlying asset reaches $7,200, the buyer would pocket a net profit of $100 — a 100% return on investment (ROI). If the price of the underlying asset reaches $7,300, the buyer would have a net profit of $200, or a 200% ROI.
In the immediate future, Gong added that derivatives like futures and options could prove to be a useful hedging tool, not only for retail and institutional investors but also for miners who are facing intense economic pressure ahead of the May 2020 Bitcoin halving.