The easiest way to exercise Binance Vanilla Options

TutorialsDecember 29, 2021

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Exercise of an Option means the exercise of the right under the option contract of the buyer. Buyers can choose to exercise the option or not. Accordingly, the option seller is obligated to ensure that the buyer can exercise that right under the contract. The following article explores the exercise of a user’s options when participating in Binance Vanilla Options trading.

How are options exercised?

In Binance Vanilla Options trading, the exercise of the option depends on whether the final specified price is greater or less than the strike price.

If the last specified price is greater than or equal to the strike price:

  • Exercise Call Option:

For the buyer, if the profit is greater than 0, the option is automatically exercised, the exercise fee is automatically deducted, and the buyer receives USDT. Meanwhile, the Seller needs to cooperate with the buyer and make sure the option is exercised. The buyer’s profit is deducted, and the remaining collateral is returned to the Seller’s account.

  • Exercise put option (Put Option):

For the buyer, if the profit is less than 0, the option automatically cancels. Accordingly, the Seller’s collateral is returned.

If the last specified price is less than the strike price:

  • Call Option exercise:

For the buyer, if the profit is less than 0, the right to exercise the option is canceled. The Seller gets a refund of the collateral.

  • Exercising a Put Option:

For the buyer, if the profit is greater than 0, the option is automatically exercised, the exercise fee is automatically deducted, and the buyer receives USDT. Accordingly, the Seller needs to cooperate in exercising the buyer’s option and the buyer’s profit minus, the remaining collateral is returned.

Binance Vanilla Options exercise example.

Let’s take the example that BITCOIN increases the price, and a user buys a call option.

If the market price of BTC is greater than or equal to the strike price and the buyer’s profit is more significant than zero on the expiration date, the contract automatically executes. After deducting the insurance and transaction fees, the Seller delivers BTC to the buyer at the actual price, and the buyer’s profit is paid in USDT. Binance’s system automatically exercises the right to deduct the spread paid from the Seller’s warrant fee to the buyer and release the remaining funds and premium received from the sale of the option contract to the Seller.

Conversely, suppose the user’s final profit (PnL) is less than zero. In that case, the options contract expires and becomes worthless, the buyer loses the security premium paid for the call options to the Seller, and the Seller’s deposit is returned to the account.

In practice, options products are heavily leveraged. An example of using leverage in vanilla options trading is as follows:

Contract buyer (Call Option), BTC price is 32,000USDT. After the buyer pays the Seller 500 USDT as a premium, the buyer is entitled to profit when one BTC rises to 34,000 USDT. If the BTC price is 35,000 USDT on the expiration date, the buyer’s profit is: 1,000 USDT (Difference) – 500 USDT (premium) = 500 USDT. The profit margin is 100%, while the actual price increase of BTC is 9.38% with 10x leverage.

If the price of BTC is 37,000 USDT on the expiration date, the final profit will be 2,500 USDT with a yield of 500%, while the actual gain is 15.6%, and the leverage multiplies 30x.

Conclusion

In short-term Vanilla Options, the buyer can give up their right at expiration and accept the loss of the premium paid. Binance Vanilla Options uses different prices where the Seller simply pays the buyer the amount of profit made on the expiration date.

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