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[Swap Trading] Introduction of Volatility Contract

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1. Definition

A move contract is a type of contract that can be opened on both long and short sides, and users profit from price increases and decreases in the move contract. When a user opens a long position, the user can benefit from the price increase; when the user opens a short position, the user can benefit from the price decrease. By increasing leverage, users of move contracts can magnify their gains, but with increased leverage comes increased risk, and losses are magnified.
 
The move contract is a settlement contract, i.e. at the settlement point on the settlement date, we will deliver the user's position in the move contract based on the settlement delivery price and calculate the user's settlement profit or loss and credit it to the user's contract account. D-net's move contracts are only for cash delivery and not for physical delivery.
 
From the price calculation, the essence of the open move contract is to buy a call option (hereinafter referred to as call option) and put option (hereinafter referred to as put option) corresponding to the specific strike price of the underlying asset, and the mark price of the move contract is the sum of the premium of the call option and put option. Then the price change of the move contract, in essence, corresponds to the specific exercise price of the underlying asset call options and put options options which is due to the constant changes in the price of the underlying asset, as well as approaching exercise date and other factors.

 

2. move contract-related indicators 

The name of the move contract consists of the following elements: take "BTC-MOVE-20220701" contract as an example, "BTC" indicates that the move contract's mark price consists of the premiums of BTC call and BTC put options; "MOVE" indicates that this contract is different from perpetual swaps and is a volatility contract; "20220701" means that the delivery time of the move contract is 4:00 pm on July 1, 2022(UTC+8).
  • Settlement of move contracts: The process of settling positions in move contracts and Performing the delivery PnL calculations on these positions. Users can view all delivered move contracts on the Settlement History page. User's personal settlement profit and loss can be seen in the Settlement tab.
  • Settlement time of move contracts: The date in the move contract name is the settlement date. All weekly move positions are settled every Friday (East 8) at 4:00 pm and new move contracts are launched every Friday (East 8) at 5:00 pm.
  • The strike price of the move contract: The strike price of the BTC-MOVE contract is the TWAP of the BTC spot index price one hour before the contract goes live.
  • Estimated settlement price of the move contract: The estimated settlement price of the BTC-MOVE contract is the TWAP of the BTC spot index price an hour before the current time point.
  • Settlement price of the move contract: The settlement price of the weekly BTC-MOVE contract is the TWAP of 3-4 pm every Friday (East 8).
  • Risk reserve for move contracts: Similar to sustainable contracts, The forced liquidation position in the MOVE contract will be taken over by the system. After the takeover is completed, the assets exceeding the user’s forced liquidation loss will be injected into the insurance fund. If the user's position encounters a breach during the forced liquidation process, this part of the loss will be borne by the insurance fund as well. All changes of Risk Reserve will be displayed on the Insurance Fund page. All BTC-MOVE contracts share the same set of risk reserves, and all ETH-MOVE contracts share another set.
  • Settlement proceeds of move contracts: PnL = (number of positions * Face value)*(settlement price - average opening price)
  • Settlement fees for move contracts: Settlement fees are generated When the position of the move contract is delivered. When calculating the settlement profit and loss, the settlement fee will be deducted and credited to the contract account.
  • The marker price of the move contract: The marker price of the move contract is is substituted into the standard Black-Shcoles-Merton model by fitting the implied volatility of the option corresponding to the strike price to calculate the quotation of these options, thereby deriving the mark price of the MOVE contract.
  • Move contract settlement records: you can view the settlement tab in the move contract trading page settlement contract, delivery time, delivery price, delivery position and profit and loss. You can view the delivery date, delivery contract and delivery price on the delivery history page.
It should be noted that the estimated settlement price is not equal to the settlement price, and the settlement profit and loss is calculated based on the settlement price. The marker price determines the unrealized profit or loss of the position and the closing PnL before delivery, and the delivery price determines the actual profit or loss after delivery.
 

3. Advantages of move contracts

Why trade move contracts when there are perpetual swap? move contracts give investors a different investment experience and opportunity: users do not need to have a prediction of the direction of BTC price changes, but can earn investment income by correctly predicting the size of fluctuation of BTC.
 
When users trade perpetual swap, if they expect the price of BTCUSDT perpetual swap to rise, they will go long on BTCUSDT perpetual swap, and then sell the perpetual swap when the price rises, with the spread being the reward for accurately predicting the direction of price changes in BTCUSDT perpetual swap.
 
When the user expects the price of BTCUSDT perpetual swap to fall, the user sells BTCUSDT perpetual swap, and when the price falls to the user's expected low, the user then buys to close out the contract and earn the difference.
 
As with any financial product, earning money through move contracts requires an expectation of the market. move contracts are different from perpetual swap in that trading move contracts does not require any expectation of the direction of change in the underlying asset of the move contract (e.g. up or down, the underlying asset of BTC-MOVE-XXXXXXXXXX is a BTC option contract), but requires the user to have an understanding of the BTC spot in the corresponding period of time to have their own idea of how much volatility. For example, when the user expects the price of BTC spot to fluctuate significantly in the following week, before the arrival of next Friday, then the user can purchase move contracts to confirm whether their ideas are in line with market movements. When the price of BTC spot fluctuates significantly, regardless of whether the price of BTC spot is significantly up or down, users can benefit by going long on move contracts. When the user expects that before Friday comes, the price of BTC spot is likely to fluctuate in a small price range, or that long-term sideways, the long and short sides are evenly matched, the user can short move contracts to test whether their ideas are correct. If the price is really sideways as it wants, then the user can make a profit by shorting the move contract, and the profit earned is the option fee for shorting BTC calls and puts, which is the option fee paid by those who are long on the move contract to buy the option upside and pay the option fee.
 
Trading move contracts do not require precise judgment of the direction of BTC price fluctuations, if the user is long, regardless of the BTC price up or down, can earn investment income.
 
If investors are short, they can earn investment income during sideways trading (this is also the strategy of many hedge funds), but when the market is not volatile, sustainable contracts cannot earn sideways income.
 
In summary, going long or short on a sustainable contract is a bet with the market on the direction of BTC's price movement, and going long or short on a move contract is a bet with the market on whether or not BTC is volatile.
 
 

4. move contract and the difference between options

It should be noted that, unlike options, move contracts are still essentially contracts, and since they are contracts, when there is an adverse price movement, the position will be blown out. If the move contract is blown out before delivery, it will not enter the delivery session. The margin formula for buying move contracts is the same as for Digifinex perpetual swap.
 
-Options long position: have the right (European-style options have the right to perform on the expiration date), no obligation (no exercise obligations), will not blow up; when the option fee increases, you can earn the difference by closing the long position.
 
-move contract long position: no performance rights and obligations, the position will be with the price of adverse changes (down) and the risk of blowout; unrealized gains and losses will increase with the price, the user can close long positions to earn the difference.
 
-Options short position: there are obligations (performance obligations and account to retain the obligation to perform the margin), no rights (no right to refuse to exercise), if the account is insufficient funds will be judged as the ability to perform the contract in the future, will be reduced; when the option fee falls, you can buy back the option by closing the short position at a low price, high sell low to earn the difference.
 
-move contract short position: no performance rights and obligations, the position will be with the adverse price changes (up) and the risk of bursting; unrealized gains and losses will increase with the decline in the option fee, the user can get through the short position for example.
(The above example is based on the weekly move contract only)

 

5.Consistency and differences between move contracts and perpetual swap

5.1 move contracts and sustainable contracts have the following differences.

1. the judgment of market changes, sustainable contracts need to determine the direction of price changes, move contracts need to determine whether prices will fluctuate significantly. 

2.the price of a perpetual contract is closer to the price of the spot.

 

Marker price = spot index price + MA60 ((contract sell price + contract buy price)/2 - spot index price)
The markup price of a move contract is based on the call and put option premiums on the underlying asset of the move contract corresponding to the strike price.
  1. move contracts are different from sustainable contracts, move contracts do not have a capital fee rate and do not require regular payments or capital charges.
  2. move contracts have an exercise price, used to regulate the price of the move contract should be the underlying asset corresponding to the exercise price of the option fee sum.
  3. move contracts only have U-standard contracts, while sustainable contracts have both U-standard and currency-based varieties.
  4. move contracts will be delivered on schedule, sustainable contracts will never be delivered. At the moment Digifinex only has move contracts with a weekly delivery time frame. Weekly contracts will be delivered every Friday at 4pm (East 8) and a new move contract will be put online every Friday at 5pm. As long as the move contract is held before 4:00 p.m. on Friday, the position will be delivered on time at 4:00 p.m. The settlement record will be displayed in the settlement tab on the trading page after the settlement (also displayed in the Personal Center settlement tab).

5.2 Similarities between move contracts and sustainable contracts: 

  1. the methods of opening and closing positions in move contracts are the same as in sustainable contracts. move contracts are also subject to blowouts due to unfavorable movements in marker prices.
  2. the expected strong parity price of move contracts is calculated in the same way as that of sustainable contracts.
  3. the leverage multiplier for move contracts is the same as for sustainable contracts, ranging from 1 to 100 times.
  4. the spot index price of BTC-MOVE-XXXXXXXXXX and the spot index price of BTCUSDT are calculated using the same formula.
  5. move contracts can be held in both directions, as well as perpetual swap.
  6. move contracts, like sustainable contracts, can earn investment income by buying low and selling high, as well as by selling high and taking low. 

 

6. How to calculate the profit and loss of a move contract?

Without considering the handling and delivery fees.
Open long.
Assuming that the user opens 1 contract BTC-move-20220701 at a market price of 1000 U, with a contract value of 0.01 BTC and a leverage multiple of 1x, the user's position margin occupation is 10 U.
Margin occupied by a single position = contract face value * number of open positions * average price of open positions / leverage multiplier
10U = 0.01 * 1 * 1000/1
When the marker price of the contract BTC-move-20220701 increases to 1200U, the unrealized profit/loss of the position is 2U.
Unrealized gain/loss on opening a long position = (marker price - average price of opening position) * contract face value * number of contract positions
2 = (1200-1000)0.011
At the time of delivery, if the delivery price is 2000, then the settlement profit and loss can be calculated by the following formula.
PnL = (number of positions * par value)(settlement delivery price - average opening price) 10U = (10.01)*(2000-1000)
 
Open Short.
Assuming that the user opens short 1 contract BTC-move-20220701 at the market price of 1000U, with a contract face value of 0.01BTC and a leverage multiple of 1x, the margin occupied by the user's position is 10U.
Margin occupied by a single position = contract face value * number of open positions * average price of open positions / leverage multiplier
10U = 0.01 * 1 * 1000/1
When the marker price of contract BTC-move-20220701 falls to 800U, the unrealized gain/loss on the position is
Unrealized gain/loss on open short = (average price of open position - marker price) * face value of the contract * number of positions in the contract
2 = (1000-800)0.011
At the time of delivery, if the delivery price is 500, then the profit and loss on delivery will be
PnL = (number of positions * face value) * (settlement price - average opening price)
5U = (-10.01)(500-1000)
 

7. MOVE contract trading account

Move contracts and perpetual swap share the same contract trading account, move contracts also belong to the USDT native contracts, the use of the contract account in the USDT as margin. Currently Digifinex provides full position mode, so the explosion of other U-standard contracts will also lead to the explosion of the move contract, please trade with caution.
 
 

8. [Tutorial]- How to trade Volatility Contract

 

Tips, beware of false customer service:
1). Do not provide account password, SMS, Google verification code, WeChat and bank card password to anyone including DigiFinex Exchange Customer Service
2). Please look for the official website: Digifinex.vip & DigiFinex.com
3). Don't click on the unofficial link, beware of computer poisoning information leaks.
4). The DigiFinex exchange staff will not ask you to transfer the payment.
 
 

What should I do if I encounter a problem?

Click here to see how to contact Digifinex customer service

 

Thank you for your support!

 

DigiFinex Team
Aug 18th, 2022

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