Topic: [ANN] Trade Bitcoin Options - BitcoinOPX.com [NOW OPEN] - page 3. (Read 18848 times)

Awesome, I'm glad that the quantity scales with volatility and time exposure.  As to the percentage price changes - I think eventually a market-based approach would be best (that's how it works "in the real world" for the most widely-traded products).  Basically we can sit here and say "a 15% price move in a week is reasonable", but until we get our hands into the data, we are really just talking.  If we use arbitrary numbers to determine what we think is reasonable, we're bound to get blown out of the water or leave money on the table.

Here's what I would do:
-Calculate the historic volatility for the term of your contract and used a distribution based approach to determine what is reasonable

Here's how to tangibly do this for a 1-week contract:
-Pull the historic price change every week since the inception of BTC
-Get a table with the weekly percent changes in price since BTC began to be traded
-Take the average of the weekly price changes and the standard devation
-Add the average by 2 x the standard deviation of all of the price changes
-Whatever this number is represents the percent change to apply to a weekly contract
-This number that you get means that 95% of the time, the weekly price change will be less than this and it is a good number to use for your contract...or the flip-side: every 20 weeks, a price change will happen that is greater than this
-You need to repeat the above steps for whatever the term of the contract you are offering will be (aka for two months into the future, you need to pull prices for every two months and repeat the steps)

This is a lot of work, but it will get you a seriously mean product that is more robust.  It can also save you some money - what if the reasonable weekly price move is around 5%?  You're cutting your customer's capital - vital capital that could be employed in trading and generating you more commissions.

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About your comment to FreeMoney regarding the commission - this is why you need a percentage-based commission (just like Mt. Gox).  Do you think Mt. Gox would get the same trading volume if they charged every trade a $4.95 commission?  You stated that you are basing this model off of Zecco - a retail stock brokerage.  Here's the reason they only offer 100 share options - anything smaller represents an odd-lot transaction in the stock market.  Bitcoin doesn't have these restrictions.  The most logical granularity for contracts at this moment is 1 BTC.

@Goomboo: thanks for the continued feedback.

- regarding 52 weeks of contracts I know what you mean. My belief is most of the option action will be within 4 weeks, and then maybe another smaller cluster around 24 weeks (6 months), and finally a few at the last outpost 52 weeks (1 year) away.

There will not likely be much action within other areas at the outset. However, as each week elapses options will likely fill in for every week of the year upon reaching that point. It will probably be helpful to add a scroll button to the option chain chart for this reason, but I don't see this being a problem.

I prefer weekly Maturity to bi-weekly, because with bitcoin things can change that fast.

- regarding traders trading different lot sizes they are certainly able to. There is nothing which prevents mixing of lot sizes. A trader can trade 100 lot sizes, then adjust the chart or field and trade 10, or 1000 BTC lot sizes at anytime.

- regarding dynamic lot size starting with 1 BTC I don't think that would work well, actually for the same reason you give about having 52 weeks. It's harder for the market to concentrate around any particular grouping. Traditionally, of course, an option represent 100 shares of a company. Can you imagine if the model were switched to allow dynamic sizing of underlying shares? How could traders find common ground or value on options for AAPL which could be 63 or possibly 1,022 underlying shares?

Thank you for being responsive to feedback - you have potential customers who are excited about your product as well.

I see another serious issue with your platform and that is liquidity.  Right now you offer what, 52 weeks of contracts?  That is 52 different products...do you realistically expect to have any trading interest for that many trading points?  The trend in derivatives is that the highest volume of transactions / deepest liquidity is in the shortest term contracts and the farther out you trade into the future, there is less and less of a market.  Also, why would someone care about trading week 40 or 45?  There is no fundamental significant difference here - no one realistically cares up to a certain point into the future.  If no one cares, no one trades; if no one trades no one cares...it's a vicious cycle.

Here's a solution:

Offer:
-Only two weekly options - this week and next week and continuously roll them into the future (aka when the prompt week expires, add a new option after the next week)

-An option through the end of this month

-An option through the end of this quarter

-An option through the end of this year

Some people may be like "well, I want to trade 10 years into the futures!"  You can solve this by having an OTC (over-the-counter) section of your website where people are allowed to create custom option deals seeking buyers / sellers.  This isn't essential, but it would make for very interesting interactions between customers - I vote that you create something like this after a few months of consistent interest in your site since it isn't that important.


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Now about the contract size.  From what I see, it looks like you have the 100 and 1000 BTC contracts as entirely different markets.  What I mean by this is that if someone wants to sell a 1000 BTC option, 100 lot people can't come through and nibble off of the order.  This is a problem.  In the first paragraph, I pointed out that you have a serious issue in that in a single year you have 52 different markets.  If the different contract sizes can't trade together you now multiply this by two.  Even if Mt. Gox opened an option exchange, they couldn't populate 104 different markets.  You solve this by abolishing your contract size and make everything in increments of 1 BTC.  A smaller contract size with less terms to trade forces all of the trading interest into a few locations.  This boosts liquidity, customer interactions, etc.  These are positive factors which feed on themselves - the more trading, the more customers, the more customers, the more trading.

Hello again everyone!

I'm pleased to announce new changes.

First, we are switching to a formulaic, rather than fixed, escrow to back options. Details are on the updated How it Works page. Here is an example showing benefits.

Escrow (calls) = (current price + price move potential of current price) - strike price x number of bitcoins

Bob creates a CALL 100 option with strike price $5.50 expiring in 1 week.

Escrow = ($5.25 + 15% of $5.25) - $5.50) x 100 = $54.00

So Bob must leave $54.00 in escrow to open this position at a 1 week term.

This model also takes volatility risk into account as time lengthens. Below is an example with the same values but at 24 weeks (6 months)

Escrow = ($5.25 + 70% of $5.25) - $5.50) x 100 = $343.00

Now Bob leaves $343.00 in escrow to open this position at a 24 week (6 month) term.

We find the volatility risk has drastically raised the amount of funds Bob needs to open this position at a 24 week (6 month) term. This leaves room for bitcoins to rise 70% in 6 months, which is feasible.

Another key change is the ability to now set View All on the option chain chart to see the full range of options.

_________________________________________________________________________

@FreeMoney: if you look at the math on a 1BTC lot you'll see it doesn't work very well. Let's use the values above but say Bob creates a CALL 1 option with strike price $5.50 expiring in 1 week. The current price is $5.25. Let's say the price jumps in one week .30 cents which could be normal these days.  Bob would pay the difference between strike $5.50 and price $5.55 which is $.05 multplied by 1 is still $.05. That amount doesn't make much sense to me, especially considering trade fees would make it negative.

If the price jumped $1.00 (not common these days) that would equal a $.75 payout before trade fees.

It accommodates all types by not offering 1BTC lot?

You've got a bootstrapping problem. Few people are going to jump in first for a larger amount.

@Goomboo - thanks for the great feedback. This is exactly the purpose of this thread.  

- The biggest reason to not offer a 1 BTC lot size is simplicity, not our trade fee. It's important to me to keep things from being too complex. Not everyone has the obvious depth of trading knowledge and experience you do. This exchange has to accommodate all types.

- regarding trade fees, Zecco trading became hugely successful by offering strictly online trading of stocks and options, which allowed them some of the lowest fees around. Their fee is $4.50 per trade and $.65 per contract.

https://www.zecco.com/explore/online-options-trading.aspx

- regarding mitigating counter-party risk, I agree largely and I'm considering dealing with the issue as you suggest.

@mlawrence I'll reply to you first.

As I'm sure you're aware much of Bitcoin and the ecosystem growing up around it is in various shades of legal gray area. Some is specifically illegal, like online poker playing in the US.

Many Bitcoin businesses try to operate openly, transparently, and legally, even if they don't start off that way. The exchange Tradehill is an example business that attempted doing everything by the book, and got shut down.

It's not clear what legal status BitcoinOPX would garner, although we're inclined to predict going the "Tradehill route" if we started out fully transparent. For this reason, like the ownership of poker site SealsWithClubs.eu, we choose the protection of anonymity for now.

Believe me if scamming and theft were the goal it would be much easier to create an online wallet or bitcoin currency exchange with the intention of eventually disappearing.

I really should charge a consulting fee for giving any more information about how this stuff works in the real world.  I have more ideas of what I'd love to see in the platform and what would make a killer exchange, but I'm done with suggestions for now.

Goomboo out!

Question:  Why are you anonymous?  You don't list any names, phone numbers or addresses on your contact page.

All the security in the world is useless if the theft is internal. 

I agree - make it a small amount of time, preferably once a week (if needed).  The more up-time, the better.



I would suggest that you make your fee be BTC based.  Instead of $.65 per contract, make it $.0065 per BTC.  That would allow people to trade in whatever size they want.  Logically, your structure doesn't make any sense as is - you shouldn't pay the same commission for a 100 BTC contract that you do for a position 10 times that size.  Most serious brokerages charge you per volume you trade, not how many trades you perform.

The absolute best case for commissions however, is a commission based on the notional value of the trade.  Rather than a dollar amount per BTC, a percentage would be better.  I suggest a .15% commission.

For example:
-I buy a call for 100 BTC with a strike of $5.20
-I pay a .15% commission: 100 BTC * $5.20 / BTC * .0015 = $.78

The major benefit here is that you'll still be in business if BTC price falls to $.05 per BTC.  Think it through from a customer's standpoint - why would I use your service to trade BTC if the commission I pay is substantial in relation to the actual value of what I purchase?



Boom, you nailed it - welcome to the world of derivatives!  Derivatives introduce a whole new form of risk called counter-party risk: will the person on the other side of my trade pay up at the end of the day?  Counter-party risk is a huge component of trading derivatives and something that I think you were on the right track to answer, but I think you can do better.  I do suggest that you keep a required amount held in the customer's account, but allow the person holding the option the possibility of earning more.  Here's how:

Mitigating Counter-party Risk
-To open a trade, a customer must post enough collateral to cover a move in prices against their position equal to a reasonable amount:

Price Protection Move = (20% + number of weeks / 100) * (1 + number of weeks / 52)

-So the amount of margin they must post is: Absolute Value(Strike Price * (1+Price Protection Move) - Strike Price) * BTC of position

-Don't gloss over this, think it through.  Here's a chart showing what this looks like followed by an explanation below:



Example:
-Someone buys a call for 100 BTC with a strike at $5.20 and a duration of 20 weeks
-The seller of the call must post $288
-At the end of 20 weeks, the price is $10
-Buyer should receive ($10 - $5.20) * 100 = $480.  If the seller of the option is unwilling / unable to pay, the buyer still receives $288.  I have some ideas on how to keep the sellers of options liquid that I'll get to in a minute.

Now here's the explanation - it makes sense that your margin requirements should be sufficient to cover reasonable price movements in a given amount of time.  The chart about shows a sample of what "could be" reasonable.  It is reasonable to say that prices could go up or down 20% in a given week and that the volatility on a longer timeframe is higher.  As it stands, who would buy an option 1 year out if the most they can make on it is $150?  The goal here is that buyers of options get paid AND they have the potential to make a killing on a trade.

How to keep the sellers liquid
-Sellers of options must post collateral
-This collateral is "flagged" and they cannot withdraw that amount or that amount is not used in calculating account balance for opening new trades
-Seller must maintain an account balance equal to the floating profit of the buyer of the option or seller's account is frozen until funds are received.  The idea here is that if someone buys a call at $5.00 and price goes to $50.00, we don't want the seller of the call running for the hills.  Any funds in the seller's account are seized (up to the necessary amount) until the contract expires.

@Goomboo and @FreeMoney: regarding market hours, yes, you are right FreeMoney that closing allows room for maintenance, changes, and settlement. It's also hospitable to conservative traders. Most finance, and indeed Bitcoin too for now, takes place in the U.S. The rationale was that doubling the hours of high volume exchanges like the NYSE and being open holidays would be welcomed.

However, the great thing about Bitcoin is the freedom it provides, including a free market and I'm confident if I were I to take a poll it would favor 24/7 trading. So we will offer 24/7 trading. We want the largest trading base possible so we will deal with the technical pressures on our end.

- regarding lot size I agree there may be some that wish to speculate "for fun", similar to penny slot machines in Las Vegas. Right now with volatility in the cents range, and the fact we have a .65 contract fee, 1 BTC wouldn't be mathematically feasible. However, I will add the 10 lot size.

- regarding the $150 capped payout, it is there so option value can be guaranteed and thus speculated upon. If we were to use your suggestion what would happen when a price movement forced a margin call, and it was defaulted? The option value would be compromised. How could people reliably trade options like that?

The $150 escrow cap is not ideal, but it does allow the crucial element of guaranteed value to be established. Traders can always buy or sell more or less options to adjust profit potential.
 

I see a huge benefit to being open for trading 24/7. I'd be interested in hearing the advantages of closing for half the day. If you want regular downtime for maintenance/changes/settlement make it 1 hour per day.

I am not attempting to be argumentative.  This is my serious face :| and this is my argumentative face >:|.

Here's my reason for talking:

1. I have been wanting someone to put forth a serious effort to make an options exchange for the past year.  I became very excited when I saw that you actually had a good looking website and user interest.  I rapidly became dismayed when I actually read the details of the exchange and how things function.

2. You are presenting yourself as an entrepreneur - creating a new product for this community.  I really want you to succeed in your endeavor, that is why I am being brutally honest with the things that I (a potential customer) would like to see in your product.  I see that you are attempting to simplify the product and make mass appeal and I am telling you (as a member of the masses) that unnecessary limitations of your product really make it difficult to use.

As to your comment about the market hours: those markets are for options on stocks.  The stock market has similar trading hours as those exchanges.  These are for options on BTC, a global commodity which is not limited by trading hours.  Your logic for setting market hours based on stock market hours does not hold up.  It makes more sense to allow trading 24/7 just like BTC.


Please provide your justification for the following (in interest of time, I have provided my reasons against your settings below):

1.  Why do you have market hours for your exchange?
- Derivative exchanges (options / futures) should be (and are) open longer than the spot exchange
- Your market hours are arbitrary and do not reflect the real market for your underlying product (BTC: 24/7)

2.  Why do you require a 100 and 1000 BTC contract with no option for incremental sizing (1 BTC)?
- You would get more volume, more customers, and more liquidity in your product if you allowed small traders to speculate
- A 1 BTC option would allow all sorts of individuals to hedge existing positions or speculate on price movement
- As the price fluctuates, you are diminishing the effectiveness of your product - 100 BTC at $.01 / BTC is much different than at $30

3.  Why do you cap the payout to $150 dollars rather than setting a dynamic margin requirement for opening a position?
- A more logical system would be a percent based on notional value of the contract.  For example, 20% of the notional value -> 100 BTC X $5.00 / BTC * 20% = $100 margin requirement

You're setting yourself up for a lot of headaches by these needless restrictions.  If volatility returns, you're going to have to adjust your contract size / payout every week making your long-term contracts meaningless.

Maybe I misunderstood the purpose of this thread - I thought that you were inviting people to demo your product and provide feedback prior to the main launch on this coming Monday.  I want you to succeed because I have a high interest in your product.

Thanks,

Goomboo

@Goomboo - thanks for the feedback.

- regarding CDO's and new financial products. I didn't say we were creating a new financial product, I said we base the products we offer on market conditions. I'm not sure if you're trying to be argumentative. I personally don't like CDOs, but I brought them up to illustrate the point that financial products are not all static, because you said earlier "If you base your model on this current market environment, you've got a problem - things change and trying to manually change on the fly is a recipe for disaster."

I simply said we may offer a smaller lot size of 10 at a later time, if, for example, market conditions would favor that. By not offering it now all traders can consolidate focus on existing sizes creating more liquidity for the current offerings.

- regarding market hours, yes, traders in any timezone can trade the market; if they find value in the exchange they will set aside the necessary block time to trade.

The NYSE, NYSE MKT and NYSE Amex Options are open from Monday through Friday 9:30 a.m. to 4:00 p.m. That's 6 and 1/2 hours. They also close U.S. holidays. Contrast that with us. We are open M-F 6:00 a.m. to 6:00 p.m. That's 12 hours, and we don't close any holidays.

- I'm sorry if our exchange will not meet your needs. We hope you will try it. You may like it. We have tried to set things up to be favorable to a large group of traders, and obviously opinions on points will differ.

As I said every decision made has been weighed for pros versus cons. I would be happy to explain the rationale behind any parameter you have a question about.

Anyway, best of luck with your exchange.

I personally won't trade on it with the advertised restrictions in place.  They simply don't make any sense to me - why limit someone without a very good and stated reason?  If I were to trade, it would be on an exchange that operates exactly like a standard option exchange except of course, that it is for Bitcoin.  There is absolutely no reason to get fancy and impose parameters on something that works and has worked for several years.

Best of luck with your endeavor,

Goomboo

1.  CDOs.  You aren't creating a new financial product, options are quite old.  Also, CDOs have frequently been described as "weapons of mass financial destruction".  The reason wasn't the product, it was how people treated the product in a low volatility environment (and a lack of knowledge as to the creditworthiness of the product).  When volatility increased and their product and expectations were based on a low volatility environment, chaos ensued.  You can avoid this type of issue by simply allowing users to have dynamic lot sizing.  Just a little note - in the space of our dialog, the notional value of the smallest size you can trade on your website has increased by $10 due to a $.10 rally...dynamic sizing would let traders manage their risk appropriately while allowing the small guy to play too.

2.  The market closes.  So traders in Russian can never day-trade options on your exchange?  If Bitcoin moves $1 down overnight, I can't respond by covering myself with a put?  Yikes.  Derivative exchanges are typically open much greater lengths than the spot exchange.

I agree with your goal and support you in your endeavors - please don't misread my criticism for anything but trying to objectively help you create the best experience.

@Goomboo: we don't base our business off the market environment, but we do base the products we offer on it. There is a difference. New financial products based on market conditions (like CDO's) do get created sometimes.

- Suzy didn't buy the option for $2 per BTC. She bought the option for $2. The reason Bob places the option on sale for such a low price is he doesn't think there is much profit potential for the buyer. He is only paying the price difference multiplied by 100. Since the price difference will likely be in cents he thinks he will at most pay out something in the tens of dollars (if he pays anything at all).

- Having the market close does have advantages. And you can still place trades 24 hours a day. They will execute when the market opens. The parameters we have are not arbitrary. Each decision has been weighed for pros versus cons. As traders ourselves our goal is to offer the best trading experience we can.

Thanks for getting back to me.

Here's my issues,

"Right now volatility has largely subsided"
-Options are a method of trading volatility - after all, the largest component of the fair value of an option is volatility.  If you base your model on this current market environment, you've got a problem - things change and trying to manually change on the fly is a recipe for disaster.

"This means that Bob would mathematically..."
-You have a serious issue with the premium.  Suzy bought the option for $2 per BTC x 100 BTC = $200 [an insanely high price by the way].  This $200 goes to Bob, the seller of the call option.  Bob at most can lose $150 on the option due to the nature of your platform.  Bob actually made $50 regardless of what the market does!  I think you mean the $2 is actually the price for the entire 100 BTC, but that isn't how options (on listed securities) are quoted and I seriously suggest sticking with industry standards.

Additionally:

"The market closes at..."
-Why does the market close?  There is no feasible reason for a market to close.  Are you telling me that if it is night time and I want to trade, I can't?  This makes no sense.  While typing these comments, I'm trading the currency markets...

I'm noticing a trend of your product limiting itself.  Nearly every aspect of the product has an arbitrary parameter which makes this very difficult to use.  $150, market hours, lot sizing...there really is no reason for this.  In your attempt to make it easy on the new guy, you are alienating those of us who actually trade.

I like the idea, but I think you need to eliminate all these restrictions - the more parameters, the more difficult.  In fact, I'm noticing that almost every single one of my criticisms is in regard to a parameter that limits your customer needlessly.

Thanks,

Goomboo

@Goomboo: regarding the ability to show the full option chain, that's a great idea and it will be added.

- Regarding lot sizes we chose 100 and 1000 because of typical market conditions. Right now volatility has largely subsided. People who want to trade conservatively can choose the 100 size. Plugging 100 into the trade example above gives the following values:

Bob creates a CALL 100 option with strike price of $5.25. The current bitcoin market price is $5.10. Bob doesn't think the price will rise by maturity, and places the option on sale for $2. He pays $150 into escrow to cover the option.

Suzy thinks the price will rise by maturity so she buys the option. At maturity the price is $5.42, which is $.17 above the strike price. This means Bob would mathematically owe Suzy 100 x $.17 = $17.

As you can see the dollar amounts suddenly become very small. If volatility returns to be measured in dollars rather than cents, such as if the price per BTC is $100 then we may add in a third smaller contract size of 10. Please keep in mind a user can create, buy or sell more or less of the same option to adjust their profit potential. We are trying to keep complexity down for what users have to learn and remember.

- Regarding an ability to see trade history that was mentioned in this thread earlier. That's not typically information available with options traditionally. However, we may consider adding it.

- Regarding how we determine the closing price we are very specific. It is the 24 weighted average at Maturity taken from the largest operational exchange with the highest BTC/USD volume (typically Mt.Gox). By using the weighted average small market moves are not a factor.

- Regarding the $150 cap on payout there are several things to consider. First, remember we want to keep things as simple as possible. Second, any trader can adjust their profit potential by buying more or less of the same option, or picking a different strike price. If the BTC price reaches $100 we may make some adjustments, but there will be many other things going on if that happens as well.

One more thing...

- I would be absolutely specific on how you calculate the closing price against which the options settle.  The reason is because it is easy to manipulate the price by 1-2% these days.  With the bid-ask spread around 5 cents, a single trade can make the closing price increase or decrease by a percent.  If a trader has a large position on and is close to the money, he can push the price around so that it settles in his favor, etc.  An example of clarity - I take the average of the closing prices for each hour.

- I'd just like to reiterate that it really is important to be able to see the entire market for a specific date in one screen.  I simply can't trade it if I can't see in one glance where the entire option chain is for a specific maturity.  Traders look to see what the market is thinking and weigh this against their view...if I can't see the market easily, I can't trade.

-I would suggest not capping the profit / loss on a trade.  This $150 is an arbitrary number and has nothing to do with the market price.  You are seriously limiting your customer base by capping their maximum profit potential.  One of the main allures for option traders is that the risk / reward ratio is beneficial.  By setting a cap on their reward, you are alienating a lot of potential customers.  Another problem with this $150 figure is this - does $150 make sense if BTC is at $100 / BTC?  See where I'm going with this - it's not a versatile figure AND it limits your audience.  If you limit your audience, you don't get liquidity.  If you don't get liquidity...etc.  I suggest that you have a margin requirement instead equal to ~20% of your notional position with the understanding that it is possible to have revenue shortfalls.

I really am excited about this product and the idea.  I plan on using it if it becomes a little more trader friendly.

Thanks,

Goomboo