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.
