Binance terrible volatility derivatives
Recently Binance has announced a new product in their derivatives, and I have the feeling it went a bit under the radar. For instance, this new product is only available on the mobile app and not on the website. On top of that, I could find no announcement of the Binance dashboard as it is usually done with all IEO, tournaments, etc.
The product in question is OPTIONS on VOLATILITY
If options are complex products to trade, option on volatility are even more!
There are a bunch of problem with Binance and with this product: first of all you are only allowed to BUY it, you can not sell it.
More experienced traders could think “Well, this is actually good. You know, short selling vol on such a higly volatile underlying is dangerous.. you know.. you are short vega and gamma.. durr urrr * typical trader sounds”
Second, they are very short term: the time to expiration allowed are as little as 5m, 10m and 30m. This sounds a lot like binary options!
Third, and the meat of this article, let’s have a look at the price of these contract. Are they correctly priced? Well, let’s open the mobile app and have a look. Binance allows me to set up the boundaries of my option strategy:
I want to be LONG on the volatility, essentially a long STRADDLE, lower bound at 13000$ and upper bound at 13250$, time to maturity: 1 Day. This trade would make me money if the BTCUSD price at the end of the period is either: ABOVE my strike of 13250$ plus the premium paid, or BELOW my strike of 13000$ minus the premium paid.
Please note that the size (or Quantity) of this trade is only 0.1 BTC (zero point one). Now, Binance estimates the price of this option strategy at 146$ and is helpful to tell me that I will start making profit if BTCUSD < 12253$ USD or BTCUSD > 13964$
Is this the right price? There is no such thing as the right price when trading, so let’s go to Deribit and have a look of how much would a strategy with the same payout cost us. On the left side you see calls, on the right side you see puts. Green columns are bids, red columns are asks. So for this purpose, let’s pretend we market buy and pay the highest price possible. These options are expiring in circa 1Day as well.
As said above, let’s buy the call option strike 13250$ and pay 65.65$, let’s also buy the put option strike 13000$ and pay 65.68$, total paid circa 131$.
Not too bad of a difference, right? WRONG!
On Deribit we paid 131$ for a contract worth 1BTC, while on Binance we paid 146$ for a contract worth 0.1BTC.
In practice, on Deribit, I will start making profit if BTCUSD < 13234$ or BTCUSD > 13316$, this interval is tighter than the one offered by Binance, and it put the trader in a better off position as you want the price to go outside of that interval.
Effectively Binance is extracting plenty of value from its users as they sell options at 1100% (more than 10 times) their market price. In technical terms they are selling Implied Volatility at one order of magnitude more.
This move is not very ethical from a platform that says put its users first, and I hope this shady hidden situation will be addressed soon.
You can read more about Binance vol option here.
You can trade volatility on Deribit at proper prices here.
