Topic: Everything you wanted to know about BTC options but were afraid to ask! - page 4. (Read 2861 times)

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

Anyway apparently everyone (but Bakkt) is trading options now!

https://twitter.com/FTX_Official/status/1216944833278857216?s=20


In this graph a recap of volumes:

https://twitter.com/AmunAG/status/1217041230829408256?s=20




Word of caution: Options Volumes are quaite an irrelevant metric. Open Interest is a more intresting metric, and also is very easy to "manifacture" appealing metrics.

Exactely.
65.20% implied vol. Not really high actually. Today volatility is even higher, so the price would have been higher (if we had the same BTC market as yesterday, being the volatility higher, the price of the ptions would have been higher too).


Well, The order book is quite thin (not to use other denigratoy terms) right now. THose are actually offers on those options, and I think that are irrelevant as market liquidity.
This for sure has pushed people wanting to test the market not to show prices on the engine, but "pre-arrange" the trade and the  have  it crossed on the exchange afterwards.

LOL someone really bought 250$ a call for $10 000 in february?  

I don't understand the volumes of the order book. It's for the bids and the asks? So when they write "1" it means there is only one bid or ask for this call...  

PS: In fact these trades represent only the OTC trades/Privately Negotiated Trades(PNT) according to this CME table https://www.cmegroup.com/trading/equity-index/us-index/bitcoin_quotes_volume_voi.html?foi=O&optionProductId=8875#tradeDate=20200113

Quite a successful start for Bitcoin options trading at the CME:


CME Bitcoin Options Trade $2.3M in Debut, BTC Price Hits 2-Month High


On an andedoctical record, there are the structures traded according to skew:

 
https://twitter.com/skewdotcom/status/1216867057670795267?s=21

Finally CME released a statement on Bitcoin Options:



Teey also released a quite interesting video:






Watch it here: Trader's Edge: Options on Bitcoin Futures

Some more detail on FTX.

Crypto Derivatives Exchange FTX Launched Bitcoin Options Trading

Thank you for these updates.
Very interesting seeing new competition in the market heating up.
Of course one big question mark is the accessibility of these markets for institutional and private customers and their adherence to KYC/AML regulations.
Deribit is having some issue on the matter as we speak and they are going to transfer to Panama (effectively cutting out every institutional clients.
 
Ps. Out of merits now! Will provide as soon as I get some!

Okex launched its option market just few days ago.
https://www.newsbtc.com/2020/01/11/okex-bitcoin-options-trading-now-open-for-all-gets-great-response-from-community/

Specifications of the Okex options :
https://okexsupport.zendesk.com/hc/en-us/articles/360037737011-1-OKEx-Options-Introduction


FTX the plateform in which Binance recently invested tens of millions $ launched its option market this week-end.
https://eng.ambcrypto.com/bitcoins-option-trading-hits-1-million-volume-2-hours-after-ftxs-successful-launch/

specifications :
https://help.ftx.com/hc/en-us/articles/360038094432-Options-Explainer

Gentle reminder:
today CME is starting to trade option:


CME’s Bitcoin Options Launch Today, Here’s What To Expect



Indeed Bakkt has been quite downbeat about their launch, and data on skew.com have struggled to show any relevance of their option volume. So yes, I think the BAkkt launch has been quite disappointing.

EDIT: Apparently a block trade already went trough: 5 options maturing on FEB 20 (expiry 28 Feb 2020) 8,500 strike went togh at a level of 630, corresponding to an implied level of 65.15% with the future at 8220.
This implied level is totally compatible with the one observed on deribit.
Nice!

Dude this is amazinnnngggg!! Its a very good,elaborated and a very neat explanation of options. I didn't read through all the practical thingies you wrote, cause it will fuck with my brain, and thanks for the heads-up cause I am never gonna trade options cause it is definitely not something I would want to risk my money into. But the concept in general isn't quite so bad.

You did a phenomenal job in explaining the meaning of what options are, and how they work. Its not everyday where you see proper threads with proper explanations here on bitcointalk.

I am still a little confused about the whole thing, I like understood it for a minute, and went like, wait hold on a minute, "How, what, HUH?" and its full Chinese noodles in my head :/

I am gonna read the whole thread again, for a hopeful better understanding. Seems interesting, not gonna lie.

This is very interesting example, and one of the classic use case (wondering why I didn't add it to the OP).

Basically a miner is exposed to Bitcoin price fluctuation.
They have to pay huge costs in fiat (hardware cost is still anchored in USD -even if paid in BTC-, other costs are mainly paid in fiat (electricity, other costs, workforce etc).
Their income is instead denominated in bitcoin.
Miners are then forced to sell a certain amount of their BTC income to cover their fiat expenses.

In case bitcoin goes up, they will be able to sell bitcoin higher for higher profit.
In the opposite scenario they have to sell bitcoin lower to cover they cost, thus reducing their margins.

Basically, they are LONG BITCOIN: their profits move with bitcoin price.
Graphically the situation is the following.

Today the price of bitcoin is USD 8,000.

If BTCUSD goes to 10,000 they can sell this bitcoin for a USD 2,000 profit, compared to today.
If BTCUSD goes to 5,000 they can sell this bitcoin for a USD 3,000 loss, compared to today.

Basically their profit analysis is something like that:



At 8,000 they are at breakeven, they lose below USD 8,000 and they gain above.
They are totally exposed to BTC price fluctuation, they get the swings on both sides.

if a price goes up there is no problem, the miner can pay his bill, and enjoy the profit.
If the price goes down, there are serious problems: not only the miner is forced to sell at loss to cover his expenses, but he will be forced to sell more BTC to cover the same amount of USD costs, forcing him into an a death spiral.
The solution is buying an insurance, or buying a put.

The miner pays a premium in every state of the world to cover himself from a negative outcome (BTC USD Price going down).
The negative outcome is avoided with a payoff when the BTC USD goes below a certain level.
This payoff is the put option we saw earlier:
Put=max(0, Strike- BTC)

In the example in the article, Bitmain embedded a MARCH 5000 put in the package (Bitmain sells the put to the miner, who buys it).
In the OP I reported the JUN prices, so imagine the same structure , but on JUN expiry.
The offer for a 5,000 PUT on JUN is 400 USD (399,97 for the nitpickers, let's round it).
What happens at various levels of BTC price:

Let's do some calculations.
I prepared a sspreasheet with some levels:



At 3,000 BTCUSD being long the BTC would imply a loss of 5,000 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and a positive payoff of 2000=max(0, 5,000-3,000), for a total of a-5,000-400+2,000= -3,400

At 5,000 BTCUSD being long the BTC would imply a loss of 3,000 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and zero payoff as max(0, 5,000-5,000), for a total of a-3,000-400+0= -5,400

At 8,000 BTCUSD being long the BTC would imply a breakeven.
Having bough a PUT option would have implied an additional cost of 400 USD, and a zero payoff as 0=max(0, 5,000-8,000), for a total of 0-400+0= -400

At 8,400 BTCUSD being long the BTC would imply a gain of 400 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and a zero payoff as 0=max(0, 5,000-8,400), for a total of 400-400+0= 0

At 10,000 BTCUSD being long the BTC would imply a gain of 2,000 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and a positive payoff of 2000=max(0, 5,000- 8,400), for a total of 2,000-400+0= 1,600

Summing up, the payoff would have been:



AS you can see , the miner , the buyer of the put options gives up a little bit of gain upside, to buy a protection in case of a lower catastrophic BTC price event.
This is the typical example of an option bought for hedging purpose.
Please note as the total payoff has a lower risk for the miner: the miner has decreased his risk using this derivatives: this is quite opposite of the mainstream version of derivatives as dangerous instruments.

Miners have always found these instruments useful for hedging their investment, and Bitmain caught on to it recently
https://coincodex.com/article/6270/bitmain-will-offer-put-options-on-bitcoin-to-mining-hardware-buyers-as-defense-against-price-decline/
Perhaps you could explain how it all helps the miner?

Not always trading can give solution for getting profit because many beginner not understand about how to start trading with bitcoin and altcoin, they look just allowing what other said about which one have to buy and trade, they not really understand about way how to begin with trading and choose best coin can give much profit with their way in trading.

Option trading is really cool and there was a time I used to think that it was the same thing with stock trading and after a bit of research I got to understand that there’s a difference between the both of them. Option traders benefit from variety of stock market outcomes as you have explained here.

I haven’t taken the time to dig into this option trading and understands how it really works, but I’m going to do that soon, and thanks for taking your time write down all these, it’s not easy, not everyone can take out time to break it down like this.

Hello,
CME made available the full specification of their BTC options.
Of course we are talking about cash settled options here.

Options on Bitcoin Futures

I was always recommended to stay away from options by traders who are farther in every facet than I am, which I respected but I kept wondering what made options so complicated and risky to trade. This puts things into perspective and I thank you for that. It kinda makes me happy that I didn't proceed to mess with options despite their utility (utility only for those who understand their workings).

I'll just stay within the areas of trading I'm comfortable with. No point in taking on more risk and complicating the whole process of trading. Simplicity is worth a ton.

Bakkt should provide a similar explanation since their aim is to be a retail platform, but I'm pretty sure that they won't go that far because it may scare off a lot of people.