Ⅰ. OKEx Options Introduction

1. What are options?

a) Options give contract holder the right to buy or sell an underlying asset on a fixed day in the future. The contract holder (buyer) can choose to exercise the option if she or he can benefit from doing so. The contract writer (seller) will have to pay relevant amount to the contract hold If there is no benefit from exercising, the buyer can choose not to exercise it. The seller does not need to pay anything in this case.

OKEx offers crypto options trading for Bitcoin, Ethereum and EOS, allowing users to buy and sell call and put options.

b) Basics of options:

Underlying asset: asset for trading on which derivatives contract’s price is based, including commodities, financial assets, interest rates and composite indices. For example, the underlying asset of Bitcoin options is BTC/USD index.

Expiration date: the date on which the option expires.

Exercise price (or strike price): the price at which the option holder can buy or sell an underlying asset when exercising a call or put option respectively.

Contract Types: options are categorized into different styles. They can be classified into European, American and vanilla options given their exercise styles.

Option premium: the price at which an option is bought or sold.

European Option: it can only be exercised on its expiration date. (OKEx Options are European options)

American Option: it can be exercised at any time prior to its expiration date.

Others: there are different types of options available on the market other than European and American options, such as Bermudan option.

Options can be classified into in-the-money (ITM), at-the-money (ATM) and out-of-the-money (OTM), depending on the difference between the strike price and the price of the underlying asset.

c) Both the option buyer and seller can choose to close their open position(s) prior to or upon the expiration date.

2. OKEx Options Contract

OKEx Options Contract, one of our derivative products, are settled in BTC, ETH, EOS and other cryptocurrencies. The face values of BTC/USD, ETH/USD and EOS/USD options for pricing purpose are 1 BTC, 1 ETH and 1 EOS respectively while the contract multipliers of them are 0.1, 1 and 100 respectively. Hence, each BTC/USD option contract represents 0.1 BTC, ETH/USD option contract 1 ETH and EOS/USD option contract 100 EOS. Investor can pay option premium to buy call or put options in order to lock in the prices for buying or selling the underlying asset upon the expiry of the options contract. You can also short options contract to earn options premium immediately. In such case, you have the obligation to buy or sell the agreed number of the underlying assets at fixed prices upon expiry. Prior to expiry, both the buyer and the seller can close the open positions and free their rights and obligations in advance.

Basics of OKEx Options:

Take Call Options Contract BTCUSD-190927-6000-C as an example. The name implies that the underlying of the contract is BTC/USD index, the contract expiry time 08:00 Sep 27, 2019 (UTC), exercise price 6000 USD. If the price of BTC/USD index is 9000 USD, higher than 6000 USD upon expiry, the option holder can receive a payment of [(final settlement price - 6000) / (final settlement price) x contract multiplier] = [(9000-6000)/9000] x 0.1= 0.033 BTC. However, if the price of BTC/USD index is lower than or equal to 6000 USD upon expiry, the holder will not receive a payment. Same goes for ETH/USD and other index options.

3. The Design of OKEx Options Contracts

The differences between OKEx options and futures are as follows:

(1) Different rights and obligations

When trading futures, both the buyer and the seller are obliged to settle a futures contract.

For options, the buyer has the right, but not the obligation, to buy or sell the underlying asset after paying the premium.

(2) Different margin requirements

When trading futures, both the buyer and the seller have to pay a margin deposit to open a position.

For options, only the buyer pays a premium, but no margin. Only the option contract seller has to pay a margin.

(3) Different potential risks

When trading futures, the potential gains or losses for both buyers and the sellers are unlimited.

For options, the potential gain from buying an option contract is unlimited, but the loss of a buyer is only limited to the premium paid. However, the potential loss of selling an option is unlimited, but the profit of selling is limited to the premium received.

(4) Features of OKEx Options:

• Settled with cryptoassets: Our options contracts are settled in cryptoassets instead of fiat currencies, which breaks out the geographical and currency limitations to options trading on exchanges. Qualified traders can easily trade options at OKEx from all over the world.
• Broad offerings: OKEx offers options with a lot of different expiration dates and exercise prices for users to choose from.
• Transparent price discovery system: Unlike some warrant products that only allow buyers to purchase at sellers’ set prices, we allow both options contract buyers and sellers  to quotes freely, which greatly enhances trade freedom and market transparency, and enables the traded prices to closely reflect the market trends.
• Robust anti-manipulation system: In order to prevent the phenomenon occurred commonly in the past that some users may manipulate close price in the crypto derivatives market, OKEx has designed a robust anti-manipulation system. We average market data of different exchanges in last trading hour for a final settlement price to prevent price manipulations. The options mark price is determined by the Black model on a real-time basis. This ensures our options market is not impacted by any single large order, but reflects the overall market trends as accurately as possible. Users can make better-informed decisions based on our market data. When pricing options contracts, OKEx takes a fair reference of the overall market data to determine a fair mark price which is used to calculate users’ position value and P&Ls. We use this mark price to calculate account margins and manage platform risk , so as to minimize liquidation risks arising from market manipulation.
• Sophisticated risk management system: We formulate smart margin calculation and partial liquidation procedures according to a robust and intelligent risk management algorithm. Seller leverage allows investors not to pay full margins, thus increasing their utilization of funds significantly. The partial liquidation system helps minimize risks and losses of investors while bringing less impact to the market.

4. OKEx Options Trading Rules

To standardize trading behaviors as well as manage and control systematic risks, OKEx has set a series of options trading rules and systems. For trading, Users should follow our price and position limit rules. For settlement, our options trading operates under a daily settlement system. For risk management, we have set up margin system,  short qualification management system, partial liquidation and liquidation system, etc.

In the following chapters, we will introduce the above rules and systems in detail.