Exercise of an Option means the exercise of the right arising from the buyer’s option contract. Buyers can choose to exercise the option or not. Accordingly, the option seller is obliged to ensure that the buyer can exercise this right under the contract. The following article explores a user’s options exercise when participating in Binance Vanilla Options trading.
How are the options exercised?
In Binance Vanilla Options trading, the exercise of the option depends on whether the specified final price is greater than or lower 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 more than 0, the option is exercised automatically, the exercise fee is automatically deducted, and the buyer receives USDT. In the meantime, the Seller must cooperate with the buyer and ensure that the option is exercised. The buyer’s profit is deducted, and the remaining guarantee is returned to the seller’s account.
- Put option:
For the buyer, if the profit is less than 0, the option automatically cancels. As a result, the Seller’s warranty is returned.
If the last specified price is lower than the strike price:
- Exercise Call Option:
For the buyer, if the profit is less than 0, the right to exercise the option is canceled. The Seller obtains a refund of the guarantee.
- Exercise a Put option:
For the buyer, if the profit is more than 0, the option is exercised automatically, the exercise fee is automatically deducted, and the buyer receives USDT. Accordingly, the Seller must cooperate in the exercise of the buyer’s option and the buyer’s profit minus, the remaining warranty is returned.
Example of Binance Vanilla Options exercise.
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 is executed automatically. 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 commission to the buyer and to release the remaining funds and rewards received from the sale of the option contract to the Seller.
On the contrary, suppose that the user’s final profit (NLP) is less than zero. In that case, the options contract expires and becomes useless, 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 exploited. An example of using leverage in vanilla options trading is as follows:
Buyer of the contract (call option), the BTC price is 32,000 USD. After the buyer pays the seller 500 USDT as a premium, the buyer is entitled to profit when a 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 increase in the price of BTC is 9.38% with 10x leverage.
If the price of BTC is 37,000 USDT at the expiration date, the final profit will be 2,500 USDT with a return of 500%, while the actual gain is 15.6% and the leverage multiplies 30x.
Conclusion
In Short-Term Vanilla Options, the buyer can waive his right to 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 the profit made on the expiration date.