We are still in the first days of options market making, so we can find some gems like this one:
Short on deribit for $77 + long on ftx for $41? Arbitrage anyone?
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.