Topic: Everything you wanted to know about BTC options but were afraid to ask! - page 3. (Read 2623 times)

It used to be the case that very few platforms offered Bitcoin options, now there are more names, although the greatest crypto option volume continues to be traded on Deribit (disregarding some OTC deals),

here are 2 current charts from analytics.skew.com for more clarity:

I think I’m lost here wait... Options, like you mean options trading, the same thing we can do with IqOption and Expertoption?
Or is it a different something when it’s Bakkt and Deribit that we are talking about here . I am quite confused because I can remember that IqOption is also called options trading and they have people trading bitcoin there for as low as $10.

So, how comes are you saying that there are no other platforms where people can trade options apart from Deribit and that only whales do that? Unless Bitcoin option is completely different from what I know? Sorry, I’m quite confused, maybe cause I can’t comprehend the big article you wrote. If you don’t mind summarizing it an easy way.

Option markets are living a period of extreme activity after the halving. If this is tied to some structural change in the option market itself, to the halving itself, or to the increased number of players, namely institutional, being active in the market is maybe too early to call, but definitely we have at least a couple of things to notice.

First of all, it is not a news the overall market activity has increased, after the halving.
In particular we observed a surge in volumes at the most prominent legacy exchange. The CME.


If you squint your eyes you can see the CME before the halving



Same story for Open Interest, where CME has added a good weight. Can you see BAKKT?

The fact that open interest has increased after the halving in every exchange, make me think it is some new player entering the market. And the fact that CME has gained so much compared to others, make me wonder that it is the institutional players starting paying with bitcoin options. This particular category of investors has the highest benefit using the CME platform, rather than a whale. Remember that CME options are traded for cash settlement, making it not the most obvious choice for he who want to have exposure to physical bitcoin, like, as we said, whales.



CME hovering around 20% on Open Interest is something that would have been unthinkable only a few months ago. Let's see if they are able to keep this momentum rolling.

If we look at what actually happened on the market, after the halving, we se that, well, the activity on the spot was quite muted, we had some spike above 10,500 suddenly rejected, but nothing that triggered further sells.
Market stabilising had his toll on realised volatilities:


Dead calm on market volatility

This situation also dragged south also implied volatilities, that started following the move grinding lower. Of course short implied were discounting excessive movements from spot at the halving, those didn't materialise, so fell more markedly.



The result is the following, where implied trades at a huge discount compared to realised.


Implied Looks cheap!

One might be tempted to buy implied vols, buy option, and dynamically hedge, cashing in the difference between the twos with the hedging activity profits.  Let's zoom out a little bit:


Implied Looks cheaper!

Even if we can appreciate the discount of implied to realised, here it's immediately clearly why is that: while implied volatility is a forward looking indicator: is is an estimate of volatility level from today to option expiration, realised volatility is a backward looking indicator, being computed on the realised movement we have observed in the past. There you understand how important is the market crash of mid may, which has raised historical volatility, but it is not priced in to happen again.

Probability of market crashes are often undervalued, actually this is the main reason why skew exists. One very interesting fact about this is how market wasn't pricing correctly market crashes, and how they reacted when it happened.

 We have seen how skew on BTC option was trading negative before the crash, this means call skew was higher than put options. Then the market crash happened, traders realised crash do happen and started buying protection against it, buying puts against calls. This continued until mid may when 25d skew (remember: difference in volatility between 25%delta puts - 25% delta calls) reached historic high around 20%.


Skew being priced flat again after being priced at 20%

This is the distribution of open interest per strike: we see the upside is very well populated, also for strikes very out-of-the-money, with tiny delta.


50K strike? Really?

The same information we had on skew is conveyed by the put/call ratio. When this ratio was high, meant puts were being bought, this raised their price and so their implied volatility. We now understand how an higher put/call ratio means higher skew. On the contrary, when this ratio began to fell, also the skew returned toward more "normal" levels.



Having a put/call ratio being not at extreme level, means interest are not exactly balanced, but they are not on an extreme distribution, meaning underlying movement.

In the end I think the fall in this ratio has been due to the explosion in open interest at CME, where the ratio is actually very skewed on the upside:


1:51 are you kidding me? Aren't you supposed to be an institutional? 

I am not saying the call buying on CME made the global put/call ratio to drop significantly, but for sure din't help it growing.

Conclusion.


We had some notable change in market structure in the last month. More institutional presence, more skew, even if lately the name of the game has been on the call side of the bet, as like before the market crash: is it possible the lesson was not learned by the traders?

Halving just happened, and it is having effect on many aspects on Bitcoins: of course Bitcoin supply, with obvious implications on miners profitability, difficulty and hash-rate.
The absolute novelty of this halving is the possibility, for the larger investors, to trade bitcoins in the derivatives market.
This post analyses how the derivatives market has been positioning itself before the halving. Future posts will monitor this positioning, its evolution, and the general market dynamics after the halving. I hope that we will learn something observing markets before and after this so important moment.
Notice that in this post I will focus maninly on options, and I am running a similar analysis on my future thread.


Bitcoin options are still a very illiquid instrument over regulated platforms. Cme and Bakkt have only recently launched option trading, with very little success: for the moment combined Open Interest is still below 2%. Majority of options trading happens in low-regulated venues such as Deribit. Still, we can look at what happens on those exchanges trying to learn something.



Bitcoin Options has been rising constantly since the beginning of this year, recently reaching an all time high (ATH) of one billion USD. As you can see from the above graph the huge majority is trading on  unregulated platforms, with CME and BAKKT venues barely noticeable.

The market crash in mid mark had a very important impact on market structure on a variety of aspects.
First, the relationship between historical and implied vols dramatically shifted: as before the crash implied was trading at a premium over historical, not it is very cheap. Implied volatility has basically retraced all the splike around the market crash, while the historical volatility remains somewhat elevated.



The second effect has been the change  in the shape of the smile, or the relative price of call and put. Historically the Put/Call ratio in bitcoin has always been below one. Meaning the investors are are more focused on the upside plays.



This had a consequence that the 25 delta skew was at negative terms, or that the calls were trading at premium versus the puts, being more in demand than the puts. Basically, contrary to what happens in traditional markets, nobody was pricing a crash in price and the related high volatility.



When the market crash happened, markets observed the usual inverse relationship between market price and volatility levels: they suddenly realised that puts were too cheap and started pricing again puts at premium towards call, pushing the skew positive again.



As I said, in a future post I will continue this analysis to see how halving impacted option markets.

thanks for the informative post.

skew.com has volatility over different strike price for a month (for example May, Jun, Sept, Dec 2020 now)
but for the month of May, we have multiple expiry date, does skew uses the 29 May expiry only? or they calculate then average for other May expiry options  (15, 22, 29 May)

Well,
skew.com made a a couple of interesting tweets about the options, almost confirming what I analysed above:



https://twitter.com/skewdotcom/status/1254680478482944000?s=20

As I said in the previous message, we see volatility has returned to pre-crash values.


Another one quite interesting:



Remember that skew is quoted as the difference of the implied volatilities of a 25%d put and a 25% delta call
so
skew= 25%d put - 25%d call

where
25%d put = put with a strike such as the put itself has a 25% delta
25%d put = call with a strike such as the call itself has a 25% delta

Being d>50% obviously the put has a inferior strike than the call.

A positive skew means the implied volatility for puts trades at a premium of implied volatilities for the calls.
This doesn't mean the put have "more probability" to go in-the-money, this means only that when bearish moves happen, the market moves more than forecasted by a skewless model (like the standard B&S model, actually) .


SO the moral is i overlooked a little bit this information while looking at it on the previous post! I said I would have expected such a move, but I actually failed to spot it!

After a few weeks from the market crash, we can use this opportunity to learn something from it and apply the concept we learnt on the OP.

All the graphs and analysis are from skew.com, in case you are interested reproducing them for your own personal analysis.


Les'ts start from the price action:
 


On March 12th BTC USD Fell from 8,000 to 4,800 a fall of 40% in a few hours.

There were a few reasons why this happened, but I don't want to discuss those here, I want to analyse how that move impacted the options market.

First of all let's see at the historical volatility: how such a dramatic move impacted the realised volatility of BTCUSD?



Of course volatility increased.
Remember that "historical" or "realised "volatility" is the volatility observed on the market, computed using real data. It is something relating to PAST events. A market crash starts influencing Historical volatility after it happened. 
Particularly the impact was greater if we considered shot computation window: of course considering 1 month historical volatility this "jump" had a bigger impact rather than calculating the same measure over a 3 months windows, where the effect was barely noticeable. So, when we say that "Bitcoin volatility increased, we have to add a little bit of details to this statement.
For example we notice that, being almost a full month passed since the event, the 1m volatility has returned almost to his pre-crash level, while the other volatilities remain still more elevated.

Ok, what happened to the implied volatility?

Implied volatility is something that is not so easily computale quantity. You cannot (in almost every financial market) directly observe it, as you can only observe option prices. As we have seen, all other data being known, observing the option prices allows you to compute the implied volatility, inverting the pricing model.
Implied volatility is the volatility used to price the options, so it is the volatility used to price FUTURE events.
So how implied volatility reacted to market crash?



We see that before the crash the implied were "low" and when the crash happened they skyrocketed, almost doubling their value.
Market participants were caught off-guard from this movement and had to quickly readjust their prices.
Of course again, the options with shorter life span were the one who were impacted the most, as that "jump" highly impacted their their moneyness (and hence payoff) via the high gamma. Longer expiry options were also impacted, but you see the green line of options expiring in 6 months was less impacted. Market participants believe that volatility will stay somewhat elevated in the coming months, so we haven't see a complete retracement of volatility value.

So how do they compare putting together?

Looking  at a graph comparing te two kind of volatilites:



Of course we a re comparing homogeneous volatilities , computed on the same horizon: historical computed the three past moths, while the implied takes in consideration the future three months.
We see that prior to the crash both the implied and historical volatilities were "lows". In particular  implied volatility was trading at premium on historical volatility. An option buyer would have lost, hedging their position because the paid volatility would have been on average higher that the hedging volatility. So why did he paid such a premium? because he bet on the "future" volatility. where he would have actually had the opportunity to hedge.

When the market crash happened both volatilities skyrocketed, but now the situation is the opposite: the implied volatility is decreasing, while the historical is staying almost unchanged. This means that the observed shock is not priced to happen again in the future next three months. OF course the "risk" in the market is somewhat still elevated, and hence implieds are not yet returned to their previous state.

The last graph represent how the skew changed, or how are nod differently quoted puts vs calls: skew here is measured on volatility difference between the 25% delta put and the 25% delta calls.



We see this almost unchanged. I would have rather expected a widening in quotation, given the surge in absolute volatility level. Rather this is quite stable, meaning the investors haven't dramatically changed their appetite for one side or the other.
Another example of this is the Call/Put ratio, or the ratio between the two:



We see it quite erratic, but overall stable over the last weeks: sign that there aren't imbalances on the market participant's positioning. Only recently the call open interest has been surging again versus puts (it is indeed stable regarding the trading volume). This is a sign that option players are buying more calls than puts.

This also help us to demystify a view where derivatives are source of the movement. If we give a look at the combined graphs of volumes and open interest:


We see that volumes start growing AFTER the move, and the open interest at the same time actually shrink. This means that over the crash there was a closure of position, rather than a new position opening. Given the Call/Put ratio in addition one might suspects that during the crash many open long position had to be liquidated. This is consistent with reports of  high volumes, shrinking open position and falling call/put ratio.

Again DYOR while looking at those graphs, as looking at option only can be really misleading on market positioning of various players, as we totally overlook the total positioning : if we see a surge on put buying it's not necessarily tied on people betting on a market crash, but it might be longs trying to safeguard at least part of their position in case of a sudden downturn (like ray Dalio did with the infamous 100 Billion put on the S&P; he still was long the market!)

More and more exchanges invoved in options trading, apparetly:

Top crypto exchange Binance hints at launchig Bitcoin options trading


[img wdth=500]https://s3.cointelegraph.com/storage/uploads/view/9957c07ab28f063de5a67fd6249ab015.png[/img]


Quite interesting to me is that Cointelegrph stressed the "hedging" argument to explain the options trading rather than the "leveraged gambling tool" one.

I'm currently investigating options as a way to protect Bitcoin investors against volatility, as an alternative to sell their BTC to fiat or stablecoins (especially in volatile times). The most popular mechanism for that is a collar strategy (which was already mentioned here).

From Deribit.com data I've concluded that currently you can create a zero-cost collar (sell a call option to buy a put option) which protects you from a $500 crash while limiting your possible gains to 500$ upwards. That means, that selling a call option 500 USD above the current price, you can finance approximately a put option which protects you from the price falling 500 USD lower. (This may mean that the markets are currently undecided if the future is bullish or bearish.)

Now my question: Do current Bitcoin option platforms require you to deposit BTC if you want to sell a call option for them? For example, if I sell a call option for 1 BTC, do I have to deposit this BTC on the exchange platform to ensure I don't run away with the BTC if the BTC price goes higher than the strike price? I guess yes, or not?

What I'm looking for is ways to avoid to deposit the BTC to a custodial wallet, so I don't have to trust a centralized platform which may run away with my money. There could be ways to ensure that I (as the call option seller) cannot run away with the BTC using multisignature contracts, similar to Ethereum's "DeFi" contracts, but I don't know if Bitcoin Script allows that.

Does anybody know about such solutions? Any info is very appreciated!

Option trading is not easy. I have been into it once, and that was before I discovered bitcoin. Then I used to trade with the platform that’s called Iq option and Expert option. These platforms are very popular where I live.

But, option trading is not so easy as some may think it is and you’re likely to lose a lot of money. I have even seen some people call these platforms scammers because of them losing their money in it, but it’s not that these platforms are scammers, the problem is that option is difficult, and even more difficult when you’re trading bitcoin.

---

---

This post is eligible for my project:



If you think you can help here, just visit the thread!

Last thing I want is getting people trading options because they read this two pages.
With this post I just scratched the surface, while deeper technical topics remain uncovered (anyone fancy explanation on delta bleed and cross vega exposures?).
If you want to use options to bet your money one positive aspect is that you know how much you will lose at maximum (option premium).
I would strongly recommend start paper trading options, and only later starting buying 1 option as a bet.
Option selling or more complex structures are more advanced, and should be approached with a little bit of patience.
Same thing for some more complex trading style different from buy your option and hodl until expiry.

This is an incredible overview! All of it is accurate and there's enough information here for it to be considered a course on the investment security that is "options". All of this information applies well beyond Bitcoin. With options, you can [insert specific investment here].

The first question I (and perhaps others) have is...
If we're a first time option buyer, how do we make sense of all of your knowledge to make our first move? How do we get started?

Assuming one already has their account established, I think the best option play for a first timer is to choose one direction of the price - will it go up or will it go down? And then buy 1 options contract to call or put the price (above or below) the current price, maybe with a 1 month time horizon.

Would this be a fair way to get started?

Effect of CME Futures Options on BTC Price Depends on Halving


https://cointelegraph.com/news/effect-of-cme-futures-options-on-btc-price-depends-on-halving

According to CME Group, the good figures for a recent market with the participation of Bitcoin will continue to increase interest in the BTC futures and options market, since the article says that it remains to be seen whether the institutional market will influence before or after the Bitcoin value in the period of halving.

Soon the doubts will be cleared, there are 108 days left for halving.

Regarding the above example we can try to figure out what the above arbitrage is equivalent in terms of implied volatility.

As we can see from the figure, the Implied volatility on Deribit is quoted as the following:
BID: 89.6%
OFFER: 93.3%

The option calculation at
 http://www.option-price.com/implied-volatility.php
confirms those calculations:


(some roundings here)

On FTX instead the offfer in terms of volatility is 79.98%:

Please note there is one added day to expiry.

This means that we arbitraged almost 10% volatility spread when the bid- offer is less than 4%.
This is huge.

When I said option can lead to gains even if markets doesn’t move to in-the-money region, I was referring also to this: arbitrage.
We are still in the first days of options market making, so we can find some gems like this one:






https://twitter.com/ceterispar1bus/status/1218639096853086208?s=21

What are we looking at?
The same MAR 20 18,000 Call on two different market.

On Deribit the quote is 77.29 bid to 95.48 offer.
On FTX the same options is offered at 41 USD.

The plan is then to sell the options on FTX and buy back the same option on Deribit.
Maximum size is 50.

So we sell 50 18,000 MAR20 CALLS@77 on Deribit, cashing in 3,850 USD in premium.
We also pay 41 for 50 18,000 MAR20 CALLS on FTX, paying 2,050 USD in premium.

As we bought and sold the same option, we have no open risk, but we actually cashed in 1,800 USD in profit, as premium difference.

Wonderful, isn’t it?

There are at least a couple of things to consider:

• Margins. Opening a short position (on Deribit in this case, involves an unlimited loss. So exchanges are requiring huge capital allocated as margin to cover unrealised loss. At certain levels they even could pull the trigger on loss incurring positions, I’d not properly covered by additional margins. This adds a layer of complexity, leaving us of the choice of posting more margins on the exchange (if we have enough liquidity) or immediately close the mirror position on FTX cashing in the positive payout. in this case the two positions must be closed at the same time not to incur in p&l swings (either positive or negative).  
• Expiry dates. the two options are not exactly identical. The option on Deribit it is actually a day shorter than the one on FTX. So if we take this trade to expiry we have a mismatch. In this case it is a “good” mismatch because we bought the longer option, leaving us without downside. We can either let the time pass until expiry, or even sell the option for a premium (if in the money). In the opposite case we should consider the eventual cost to close the position, buying the one day option because there, selling the longer option, would have left us with an infinite downside.  
• This trade looks good, maybe too good. Two market makers are pricing too differently the forward volatility of bitcoin and one of the two is going to be rekkt by the end of month.

Disclaimer: I am not registered on FTX, I assumed good faith of the person who posted this example and didn’t check the reality. It’s anyway a good textbook example on how to use options.

Skew. com has finally added CME to their Open Interest Monitor for Bitcoin Options:
 



https://twitter.com/skewdotcom/status/1219545917671530496?s=20

This is a very useful tool to monitor market activity, far beeeter than trading volumes.
As stated in the OP is difficult to invert market trands from here thou.


Edit: Someone at cointelegraph is reading this thread:

CME Bitcoin Options Volume Doubles One Week After Launch, Hits $5.3M