Interview with OKEX Jay Hao: Where does the demand in the options market come from?

Author | Qin Xiaofeng

Editor | Hao Fangzhou

Produced | Odaily

Author | Qin Xiaofeng

Editor | Hao Fangzhou

Produced | Odailyimage description

(OKEX Jay Hao, photo courtesy of the interviewee)

Recently, encrypted options trading has been highly sought after by investors.

Skew data

On May 8, open interest in bitcoin options contracts surpassed $1 billion for the first time; by the end of the month, that number had risen to around $1.5 billion, an increase of more than 50%. Among them, the daily trading volume of Bitcoin options such as Deribit and CME hit new highs one after another.

Recently, OKEx CEO Jay Hao accepted an exclusive interview with Odaily. He said that the current demand in the options market mainly comes from three groups, one is the hedging demand of miners, the other is the quantitative trading demand of institutional investors, and the third is the simple investment demand of small and medium investors.

However, compared with the daily trading volume of futures, which is tens of billions of dollars, the volume of options trading is still limited.

In addition, OKEx also launched Ethereum options today, further extending the types of options products. Moreover, in order to avoid risk sharing among users, the OKEx platform has officially donated 1,000 ETH and injected it into the risk reserve of the ETHUSD option contract.

The following is the transcript of the interview:

Jay Hao added that the focus of the current option business will continue to be on the optimization of existing option products and the improvement of the market. In the future, the exercise time will be continuously extended and more types of option products will be launched.

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Jay Hao：The following is the transcript of the interview:

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1. Achievements: The average daily trading volume achieved a 385% increase

Jay Hao：Odaily: On December 12 last year, OKEx launched the option simulation order; on January 9 this year, the option real order was officially launched simultaneously on the web page and API. First of all, I would like to ask you to introduce the development of OKEx options in the past 4 months? How fast is options volume growing?

Since the official launch of the OKEx options firm in January 2020, the average daily trading volume of options has increased by 385%, and the average daily open interest has increased by 263%. Judging from the current data, when the digital currency market plummeted in mid-March and mid-May, the trading volume and open interest of digital asset options rose rapidly, and the current record for the highest trading volume appeared in the 312 plunge. According to Skew data, from March 11 to March 14, the average daily option trading volume was 14 million US dollars, with a single-day maximum of 20 million US dollars.

Jay Hao：In addition, we have done a lot of work to improve the user experience since its launch, including the launch of the tool "Option Simple Selection" to help small and medium investors choose options, the tool "Option Calculator" to calculate income, break-even point and margin, and T-shaped quotation Multiple optimization iterations of the interface. With the launch of these functions, we have seen that users are more willing to trade options, and they have also given us feedback that the trading process of the product is smoother, which is gratifying to us.

Odaily: Could you please introduce the user portrait of OKEx options? Is it mainly retail investors or institutional users, what is the average transaction volume of a single user?

At present, there are small and medium-sized investors and institutional users on the platform. It is actually difficult to describe the user profile simply because there are many trading strategies for options, and the strategies of users may be very different under different market conditions. However, we can clearly feel that users' enthusiasm for the product has gradually increased in the past few months since the option was launched.

Odaily: You just mentioned the 312 crash, OKEx option trading volume did not fall but rose. Why did this happen?

Afterwards, we analyzed that the growth may be mainly due to several reasons:

First of all, the waterfall decline highlights the hedging function of options. Everyone knows that you can insure spot or delivery perpetual contract positions by buying options. For example, if you bought a put option before 3.12, when the BTC price fell, the profit of the option position could make up for the loss of the spot and delivery perpetual contract positions, avoiding the shrinkage of the position value. Especially in the waterfall unilateral market, this feature is more obvious.

Jay Hao：Secondly, the rapid decline of BTC has allowed users who are unilaterally bearish to obtain very rich profits. From the perspective of market performance, when the market fell sharply, some users obtained dozens or even hundreds of times the position profit by doing long put options.

Finally, the market volatility has also changed greatly during the same period, and it is also a very good trading opportunity for users who do volatility trading.

In addition, at that time, very few users in the market were forced to reduce their positions during the market fluctuations. After this market, everyone began to pay more attention to the risk management of option trading itself.

Odaily: Many people carry out options trading, and they have the deepest feeling: approaching the exercise date, due to insufficient depth, they cannot close their positions in advance. May I ask, how does OKEx manage and control the depth of options, and how many options market makers are there? For options market makers, what are the "mandatory requirements" on OKEx?

The issue of depth has always been of great concern to everyone.

First of all, in terms of product mechanism design, we are committed to guiding users to provide better liquidity for the market, such as providing more favorable rates for makers (pending orders), etc. The platform hopes to guide users to provide more liquidity to the market through mechanism rules. Much mobility.

Jay Hao：Secondly, according to the needs, we also match different projects with different market makers. For now, we have also introduced top market makers around the world. These market makers have rich trading and market-making experience, strong financial strength, and the ability to provide rich quotations to the platform.

Finally, I would like to explain that the difference in depth between options and delivery perpetual products is essentially due to the characteristics of option products. Compared with delivery perpetual products, option prices are affected by many factors. Whether it is the underlying price or volatility, a slight change may cause a large fluctuation in the option market price. As a market liquidity provider (mainly doing Market makers), they will quote according to the possible price change range.

Odaily: OKEx's futures contracts have a risk reserve (currently more than 100 million USD) to prevent the spread of positions. Does option trading have the same settings? Where does the risk reserve come from, and how big is it at present? If a situation similar to the 312 plunge occurs again, can the risk reserve be able to cope with it?

The operating principle of the risk reserve fund is to reserve and accumulate a certain amount of funds in advance and inject them into the reserve fund pool to make up for the losses caused by individual users when their positions are breached.

There are two key points in this mechanism. One is whether the risk reserve pool is thick enough. In this regard, we officially donated 150 BTC as the pool at the beginning of the launch. The platform will charge a part of the penalty fee for lightening the position and inject it into the reserve. The other is the consumption rate of risk reserves. The risk control standards of the platform are very strict. In the few months since its launch, there have only been a small amount of forced reduction and forced liquidation under the market fluctuations.

Jay Hao：The extreme big market on 3.12 consumes a very small part of the reserve compared to the platform reserve pool. Because we have a robust risk control system and a relatively thick risk reserve pool, our platform is very confident in resisting various risks.

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Jay Hao：2. Product Design and Difficulties

Odaily: At present, there are some "non-traditional options" in the market, and the exercise time is as short as a few minutes or a day. In comparison, OKEx's options may be more in line with the traditional option design. Why was it designed like this in the first place?

First of all, compared with American options, the price of European options is lower, which is convenient for customers to reduce transaction costs; at the same time, when users construct investment portfolios, they will not be affected by the early exercise of American options, which ensures the stability of option portfolios; secondly, for For binary options or knock-out and knock-in options that appear in the market, they are either too risky or difficult to trade; finally, non-traditional options have certain limitations in terms of scope of application. Especially for professional traders, traditional options are easier to build combination strategies with other products. At the beginning of product development, OKEx asked many users for opinions, and finally decided to adopt the standard European option design.

Odaily: What is the difference between OKEx options, stock index options, and commodity options?

The main differences between OKEx options and traditional options are as follows:

Jay Hao：(1) In terms of asset targets, the target of digital asset options is the price index of a certain digital asset, such as the BTCUSD spot price index; the stock index option is a specific stock price index, and the commodity option is the commodity price.

(2) In terms of pricing units, OKEx options are currently priced in BTC and settled in BTC; while stock index options and commodity options are priced in legal currency and settled in legal currency.

Jay Hao：(3) In terms of delivery methods, both OKEx options and stock index options use the cash delivery method, while real options mostly use the physical delivery method.

Odaily: After the option was launched, what difficulties did you encounter, and how did you overcome them? Could you please elaborate on the point that impressed you the most?

Thanks to our profound technical strength, there were no major problems after the option was launched. What is impressive is that when the option product was just launched for testing, in order to prevent accidents, colleagues in the option department were waiting in the background 24 hours a day. It is everyone's dedication that ensures that our product technology is always at the forefront of the industry .

Odaily: Compared with futures trading, the threshold for options is higher, and the cost of user education may be greater. Could you please introduce in detail how OKEx does in terms of user education?

First of all, we provide users with OKEx’s option contract documents, which introduce the rules and systems of option products in detail, and provide users with comprehensive information;

Secondly, for novice users, we provide some entry-level tools, such as the tool for selecting options --- "Options Simple Selection", users can choose according to the prompts in the tool, which can assist users in making options trading decisions;

Thirdly, we have arranged several live courses on options on the platform to help users understand option trading more systematically and intuitively through interactive forms;

Jay Hao：Finally, OKEx Academy has set up a tutorial column for beginners in options to provide users with basic knowledge of options, trading methods, etc.

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Jay Hao：3. The Future: Extended Option Types

Odaily: At present, there is still a big gap between OKEx options trading volume and Deribit options exchange. How will we develop in the future?

Jay Hao：The main reason is that the launch time of OKEx option products is relatively short, and it is still in the stage of product upgrade and iteration. For example, we have not yet launched the portfolio margin function, which is very concerned by institutional customers. At present, our option product department is accelerating the development of related functions, and OKEx will invest more resources in the option business. OKEx has industry-leading technology and financial strength, and will provide users with better products and experience in the future. Please be patient.

Odaily: At present, OKEx only has BTC options. What is the development plan for other currency options? Which currency options do you plan to launch, and when is the expected launch time? Will you consider developing new option products in combination with the mining industry in the future?

Jay Hao：We will arrange to launch ETH, EOS options and other market-recognized products in the near future. From the current point of view, the hedging business of options in the mining industry will be a market with great potential, and we are already considering related plans.

Odaily: Currently options are European options, will American options be added in the future? When is it expected to go online?

Odaily: There are currently four options for exercising options, namely the current week, the next week, the quarter, and the second quarter. What are the plans for the future?

According to the experience of traditional finance, the distribution of option expiration dates can be more diversified. Then, as long as there is demand in the market, we will consider adding more on the basis of the existing four expiration dates, such as date options, month options, and so on.

Odaily: Will the transaction income from OKEx option trading be included in OKB’s burning plan in the future?

Jay Hao：Jay Hao: At present, the option business of OKEx is only in its infancy, and it may be considered to be included in OKB's burning plan at an appropriate time. OKB is an important part of the OKEx ecosystem. In the future, we will continue to promote ecological construction around OKB, not only to allow OKB to benefit users in more and more forms on the OKEx platform, but also to allow OKB to become more and more popular externally. Landing in many application scenarios, so that OKB has more value support.

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Four: The option market has great potential

Odaily: As a leader in the contract market, why did OKEx first choose options as a breakthrough when expanding its new derivatives business?

Jay Hao：It is mainly based on two considerations: first, OKEx has accumulated certain technical experience in the delivery contract business, which is conducive to the development of option contract business; second, investors' transactions in the encrypted digital currency market have shown diversification and refinement. trend, which creates a huge demand for options contracts.

Taking the recent market as an example, the price of Bitcoin has been fluctuating violently between $8,500 and $10,000. Obviously, it is difficult for us to go long or short simply with delivery contracts. However, using options, we can construct a butterfly spread option, regardless of the direction of the market, but only consider the volatility of the price, as long as the price is still fluctuating within 8500-10000, we can make a profit.

Another example is in the field of hedging. At present, miners mostly use delivery contracts for hedging, but if they use options for hedging, they can construct different option hedging combinations in the face of different market conditions, and can obtain certain benefits while controlling risks. income. It is precisely based on the two factors of technology accumulation and market potential of options contracts that we first choose to develop options.

Jay Hao：Odaily: What is the position of options business in the overall strategic planning of OKEx?

Options business is an important part of OKEx's strategy to build the world's largest encrypted derivatives platform, and it is also an important step in OKEx's product business innovation strategy.

In the traditional financial market, the market size of options is equivalent to that of futures, with huge development potential; promoting the development of digital asset options will help to further increase the depth and breadth of the encrypted asset market, effectively avoid the risk of digital asset decline, and reduce investors' risk. Investment costs and risks, promote investment optimization in the encrypted asset market, and alleviate the problem of insufficient stock of spot assets; in addition, based on the non-linear structure of option products, various innovative products can be developed to meet the emerging new needs and new opportunities in the market , It also brings a very large room for imagination to the entire industry in the future. Therefore, in the long run, building a digital asset options market will benefit both OKEx and the future development of the industry.

Odaily: Compared with the delivery contract market, the current options market is still relatively small in terms of transaction scale and user volume. What do you think of the future development of the options market?