Digital Asset Options Trading Research (I)

In the past 2020, the DeFi explosion has taken crypto assets to unprecedented new heights and spawned a new business paradigm.

However, various types of digital asset-based financial derivatives have also become increasingly divorced from practical and reasonable risk control.

For example, both CEX and DEX have been launching high leverage USDT contracts one after another, as if the higher leverage has become an advantage and selling point.

In an era of brutal growth and irrational prosperity that further pushes up market enthusiasm, we have to ask, where is the risk of trading going?

The first priority of investment is capital preservation, and then comes the return. Compared with USDT perpetual contracts and DeFi, which caught fire in 2020, the options market seems to have been in a forgotten corner. The specialized nature and high barrier of options has resulted in its user base remaining in a niche position in the digital asset market.

While mainstream exchanges continue to test the waters in the options market, they have not made much of a splash. But that doesn’t mean the options market is insignificant.

As an important risk hedging tool, the role of options is becoming increasingly familiar to investors in the digital asset market, and its trading volume reached $77.2 billion in 2020, showing exponential growth throughout the year.

The structure of the existing options market is facing new challenges with the entry of emerging specialized options exchanges, represented by

The speculative nature of the digital asset market is extremely high, and the vast majority of ordinary users do not have the ability to manage risk rigorously, let alone the operational habit of hedging risk through derivatives instruments. This is what hinders the further explosion of the options market, but it is also a potential driving force.

It is foreseeable that in 2021, not only the position of options in the derivatives market will become more and more prominent, the structure of the options market will also change profoundly with the development of the market.

In this DeFi series of articles, we will examine each type of digital asset market, as well as options pricing and trading hedging strategies, one by one. In the first article we will start with options derivatives trading.

The State of Options Market Development

The options market made its debut in 2020 with a total annual volume of $77,205 million, or about 1% of futures volume. Compared to traditional financial markets, options trading on digital assets represents an extremely low percentage of the overall.

This indicates that the current options trading in digital assets as a whole is still in its early stages, but the potential for future growth is enormous.

Throughout 2020, options on digital assets officially came out of the nascent stage, and major exchanges began to lay out the options market one after another. However, due to the relative complexity and difficulty of options products, relatively few exchanges carry out options trading business in 2020.

In terms of trading volume, the options market is still at an early stage of development, but the growth potential of options is more obvious compared to futures. Compared to the beginning of the year, the annual increase in options trading volume in 2020 is 3.16 times the increase in futures, amounting to 487.5%.

The year 2020 was the first year of the options market. The average daily market volume for the year was $211 million, with the highest single day of trading occurring on December 17 at $1.32 billion due to the bull market at the end of the year, and the top 10 highest daily trading volumes were also concentrated in late November and December.

The lowest single-day trading occurred on January 1, at $0.093 billion, and the low trading volume was mostly concentrated in January and April after the 312 incident.

Options Exchange Distribution

When classifying options exchanges, it is important to consider not only whether they are decentralized exchanges, but also the type of options.

The types of options can be classified as Knock-In Knock-Out options with conditions, European options, American options, and odd options, etc., according to the difference in the option strike price setting, whether the option can be exercised early, and the closing method.

In terms of the distribution of the options market, Deribit remains dominant by virtue of its first-mover advantage, accounting for 84% of the annual trading volume in 2020.

As for the distribution of different types of exchanges, the three major traditional exchanges, represented by binance, Firecoin and OK, are mainly engaged in traditional European/American options trading.

However, their options trading depth is lacking and there is a lack of market makers. However, traditional options exchanges will not only provide options trading services, but also futures trading services at the same time.

It could have been argued that the use of options as a trading hedge when trading spot and futures would have made the options trading market active, while the actual market did not show the corresponding characteristics. This indicates that the options market is still in the early stages of development and the advantages of options trading have not yet been discovered by traders.

Digital Asset Options Trading Research (I)

Global options volume and its exchange segments for the most recent trading day

Emerging Options Exchanges

Since the second half of 2020, the emerging exchanges that have emerged mostly focus on options and innovate a lot in the options business.

In 2020, exotic options products began to enter the digital asset options market. Oddball options are more complex investment derivatives than traditional options, including binary options, straddle options, etc.

The two main exchanges operating in the exotic options business include Binance and FTX. Binance launched in April 2020 the Coinan option, a modified binary option that can only be bought with a very short expiration time. FTX, on the other hand, is focusing on MOVE volatility contracts and related structured products in its options business.

However, compared to traditional options products, odd options are relatively more difficult to understand and difficult to ensure user acceptance, so they are not common in the options market and the trading volume is relatively small.

Binance binary options, which are even more difficult to understand, have low trading volume and are only available on cell phones.

Digital Asset Options Trading Research (I)

Another highlight of 2020 is the decentralized options exchange. Compared to traditional centralized exchanges, options products in decentralized options exchanges are built based on on-chain smart contracts.

In addition, the options products in decentralized exchanges are mostly American-style options that can be exercised at any time, rather than the European-style options commonly found in centralized exchanges.

Some decentralized exchanges allow anyone to shelf any form of derivatives, such as Opium, which allows for greater product diversity but also increases risk within the options market.

Currently, on-chain options products are still in the exploratory stage, and due to the specialized and high-risk nature of options, lockups on decentralized exchanges remain relatively low from a lockup volume perspective.

In summary, the trading volume of the options market shows a highly significant positive correlation with the bitcoin price and the historical volatility of the futures market and the spot market, and the volatility of the futures market has a relatively higher impact on the trading volume of the options market than the spot market.

Therefore, allocating options in a portfolio can be used to hedge against possible market risk. However, the current options market trading volume only accounts for about 1% of the futures volume, which is seriously inconsistent with the characteristics of a mature financial market.

We can consider that the current options market development is in its infancy and has great potential for the future. As an example, the options market will occupy 30% of the derivatives market, and the options market will see 30 times more room for development.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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