Topic: Call option auction discussion (Read 698 times)

@DannyHamilton I will be willing to buy call options from you at 1mBTC fixed price with one month expiry in bulk. Please let me know if interested

Well if you look at this investment by itself, then there is the downside risk. Your personal inclination to buy BTC is a different investment. When you combine both, you say there is no additional risk.

Good luck with the auction.

Exactly.  Although it doesn't feel like additional risk, since I'd probably be purchasing the 10 BTC even if I wasn't running this.

In short you are writing a covered call and taking a risk of downside on BTC

I buy the BTC at the announcement of the auction if the strike price is fixed (or at the completion of the auction if the strike price floats during the auction).

I place the BTC in an address that is available for everyone to see, so they all know that their options are covered.

If the market rate soars to infinity, then each call option buyer gets their share of the BTC at the exercise time.  If the market rate is more than the strike price, but less than infinity then they get a proportional amount of the BTC at exercise time: ((market_price - strike_price) / market_price) per BTC of options purchased.  If the market rate is less than the strike price, then the options expire and they get nothing.

Examples:

BTC rate = $500 at announcement.
Strike price = $600 at announcement.

If market rate is $599 at expiration, the option buyer gets nothing.

If market rate is $650 at expiration, the option buyer gets: (($650-$600)/$650) = 0.07692308 BTC per BTC of options purchased.

If market rate is $5000 at expiration, the option buyer gets: (($5000-$600)/$5000) = 0.88 BTC per BTC of options purchased.

If market rate is $10,000,000 at expiration, the option buyer gets: (($10,000,000-$600)/$10,000,000) = 0.99994 BTC per BTC of options purchased.

No matter how high the exchange rate goes, there's no risk for me since I'm guaranteed to get a profit of $100 per BTC purchased.

If the exchange rate drops, I'll happily hold on to the BTC that I've purchased until the exchange rate recovers back to the price I purchased them at.  Therefore, my maximum risk is that BTC crashes to $0 per BTC and I'm left holding some worthless BTC.  Since I never invest anything in BTC that I can't afford to lose, while I won't be happy about the loss, the risk is limited.

How do you hedge your risk? Or do you write naked calls?

That would be correct.

I was thinking a 2 day auction, but 3 days would probably be ok as well.


I was leaning more towards setting a fixed strike price when the auction was announced.  That way the bidders know exactly what they'd be paying for the bitcoins at the expiration of the option.  If there is a lot of desire for the strike price to float during the auction, I'm not opposed to it.  I just thought a fixed strike price would be prefered.


I'm not concerned about getting screwed.  Either I increase my BTC holdings (because the options expire without being exercised), or I increase my USD holdings (as compared to today) since the strike price is higher than today's exchange rate, and they can only exercise at that rate.


My assumption is that most people are going to bid for larger quantities, so I won't have as many winning bidders anyhow.  But the smaller unit size allows a few smaller players to get involved as well if they want to.

Good idea. 3 day auction. I would set the strike price to being a certain % over whatever bitstamp / market price is at the moment the auction ends. I would set a small minimum of course like 0.0001 per 10mbtc just so you don't get screwed.

I would do it in shares of 100mBTC also, not 10mbtc. 1000 lots is a lot to have for sale bidding wise and to keep track of who has highest bid and such.

Do 100 lots of 100mBTC if I were you, but realize it'll be a lot of work keeping track of the highest bids I bet.

So in a way, you will be writing these options. Am I correct?

I posted this in another thread, but decided that it was buried so deep in the thread it probably wouldn't be noted by interested individuals.  As such, I am re-posting it to its own thread.

Here's an idea I'm thinking about, any thoughts?

I would announce the offer of multiple 10 mBTC vanilla European call options all with the same specified strike price ($600, for example), and the same specified expiration date (2014-05-16, for example).

Lets say for example that I offer 1000 such options. (so options to purchase a total of 10 BTC in 0.01 BTC increments).

To determine who gets the options, and what price they pay for the options, I'd hold an auction.

Potential option buyers would indicate how many 10 mBTC options they want to buy, and what they are willing to pay per option.  So, a bid of "10 options @ 0.0003 BTC each" would indicate paying a total of 0.003 BTC purchase fee for a total of 0.1 BTC worth of options.

After the expiration of the auction, the highest bidder (price per option) would receive the options they wanted at the price they bid.  If any options remain, the second highest bidder would receive the options they wanted at the price they bid. This distribution of options would continue until there weren't enough options left to completely fill a bid. If there aren't enough options remaining for the lowest winning bidder, they would have the right to choose if they want to participate at their bid price for all the remaining options or if they don't want to participate at all (since their full bid wasn't filled completely).  If they choose not to participate, the process would continue with the next lowest bidder, until all options were purchased, or all bids were filled.

If multiple bidders bid the same price per option, then the bids would be filled in the order they are received.

The auction would end at some pre-announced deadline (48 hours after the auction announced, for example)

All bidders would have a specified amount of time (perhaps 24 hours?) from the close of the auction to send confirmed bitcoin transactions to the announced option address. If a purchase transaction does not receive 3 confirmations prior to the payment deadline, then their payment would be considered invalid and returned to them.  The options they bid on would remain unpurchased.

To simplify payout on the option expiration date, all bid would not be considered valid unless it includes a bitcoin address that the payout (if any) should be sent to.

I'm looking for some feedback before I decide if I actually want to put in the time and effort to run (and fund) this.

Some questions that I'm trying to make decisions about:

Is 10 mBTC per option a good choice?  Should it be 1 mBTC? 100 mBTC? 1 BTC?

How many "units" would there be interest for? (this would probably depend a bit on the size of each unit)

What would be a good strike price to attract bidders, while still reducing risk if an insufficient number of bidders participate.

What is a good amount of time to run the auction phase of the offer?  3 hours? 24 hours? 48 hours? 7 days?

What is a good expiration date for the options? May 16?  May 23?

Is this a good way to run this auction for multiple identical units, or is there some other form of auction that would work better?

Any other thoughts, questions, suggestions, or concerns?