| This is going to be a massive Expiry, with the highest Open Interest position ever.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
Deribit just added the 400K call strike! We've added the $BTC 400K strike in the Dec21 expiry! 🚀
Send tweet! https://twitter.com/DeribitExchange/status/1349566146341605376?s=20Wow! Actually, this strike has already been quite successful: already 67.5 lots exchanged:  You can spot also a block trade of 50 options. What if Bitcoin expires above 403069 on Dec 31, 2021 (350 days left?) the leverage is astonishing! Also, given the extremely high implied volatility, the delta is not so tiny: 15% is something that is going to move in your portfolio! Of course, this is not a surprise: the options market has been extremely successful in this last leg up and recorded incredible volumes:  Options volume have been steadily rising, with may exchanges with very high volumes, now almost comparable with the ones registered in the future market.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
I'm playing on the testnet and have some difficulties with understanding. Can someone take one example from my transaction log and trade history and explain to me how to interpret it? I generally understand the mechanism behind buying/selling calls and puts (thanks to fillippone) but some parameters are a bit confusing to me. What I was really hoping to see after maturity is the amount of premium I paid, the price at maturity and my profit or lose. But I'm not sure which parameter shows that. Transaction log  Trade History  Deribit has a slightly different working compared to other exchanges. First of all you should order your transactions log according to time, as I have the strong suspect it is not order with this criterium. Secondly in testate you are given a deposit of 10 BTC you can use to simulate your strategies. Then you can use those coins to trade: you buy an option and you do an "open trade" and when you sell it it is a "close trade". When you buy an option the ASK price + Fee are taken away from your balance. Your equity then becomes equal to the balance + the mark value of the option. When you decide to close the trade the opposite happens: you do the opposite sign operation on the option (sell, in this case), and the premium less fees are added to your balance, while the mark value of the option is substacted from the equity value. The exchange forces you to sell when doing the expiry of an options. Your Final P&L is then the final amount of the portfolio. The P&L on a single option is basically the sum of the trades. It might be counterintuitive, but the system is based on a "Mark to market" approach: the P&L on the single deal is irrelevant, as the only relevant thing is the final P&L of the book.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
The rally and the recent volatility gave space to Deribit to include higher strike options to their market:  I think that, apart for obvious marketing purpose, they wait for the option to have a delta of ,say, 1% before listing them. Who would trade a 0% delta option? i.e. an option that doesn't change her value with the price of the underlying? So we now see this evocative 100,000 strike call on September 2021 (expiry date 24 September 2021, the longest available expiry on Deribit). Let's look at the screen:  We see that this option quotes 3.83c bid to 4.1c, implied vol around 100% and a delta of 12%. A 12% delta, means that for every dollar in the underlying level, the call moves in the same direction of 12% of such move, 12c. Of course this gives the option a very high leverage, as with the initial cash amount (premium + collateral) we would spend for, say 1 BTC, we can gain a bigger exposure to BTC movements. This means those deep OTM options are more a gambling tool than a proper hedging tool. Also the idea of selling those to cash in the premium expose to a potentially unlimited loss for a less than 4% premium upfont. I think the risk/reward scenario is too adverse. Also the liquidity is not great. The book is quite empty at the moment:  Exiting at the wrong time could hinder the whole strategy, as on those very illiquid strikes market makers usually "remeber" the trades, and so they are quite good at "skewing" the markets against the customers.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
I think your post might make a better case against using deribit.  I use LedgerX -- I don't use deribit because it's not physically delivered, doesn't allow US customers, etc. For the same reason you cannot use Deribit, I cannot use LedgerX. I am not an US residents, and I have by no mean way of accessing that market (I might be an NFA accredited individual, but this would expose to a number of opsec concerns). So, for this pure theoretical discussion, I willl stick to Deribit, even if I do share your views toward the physical delivery exercise style. This highlights why its not very useful to consider a position without its hedges or what its hedging.
Agree, this is actually not financial advice, that I think you don't need from me (at least not on a public thread on an anonymous base), but pure theoretical speculation applying the concepts we learnt on this thread on a practical case. The positions I take are a bit wider than you assume-- $7.5k, 5k, or 2k strikes on the put side (which I try to get a premium comparable to a 15-20%/yr on the collateral, depending on the strike/date), and I'm getting more on the call side than you expected: E.g. recent trades have me receiving $2,699/BTC for JUN2021 50k, $6,985/BTC for DEC2021 35k, and $4920/BTC for DEC2021 50K, to give some examples.
Thanks for the detail, however I don't understand how you can get more premium on a wider position. We are quite close to the historical maximum, so I think you sold those options with an higher implied volatility or with a greater time value (you might have done those trades a few months ago, maybe? At the moment an hypothetical JUN21 50K CALL would trade for 810 USD or a SEP 21 50K call would trade for 1600 USD. Getting to 2,700 USD on the JUN21 50K CALL would imply a 133% on IV or a 108% on the SEP21 50K CALL. Quite difficult right now, at least on Deribit, even though I think LedgerX and Deribit quotes must be pretty aligned. So lets look at the value at expiration of a position consisting of {2 BTC, -1BTC 35k DEC2021 call, -1BTC 5k DEC2021 put} using some recent trade prices, and compare that to just hodl the same 2 BTC:
In exchange for diminished returns over a BTC price of $42,866, the position gets increased value at all lower prices.
Again it is absolutely down to personal preferences, but I see a very high asymmetry on this trade: keeping the USD as main numeraire of the trade, the loss is ee on the case of a moon scenario is orders of magnitude bigger than the benefit in case of a crash (which is ultimately due to the cashed premium). But, as you correctly said, it is down to the global portfolio allocation, and risk preferences. All this to conclude that there is not a way to determine which is the superior strategy. <...> Under a more conservative model -- using the derivative of delta at the options premium to get the assignment odds under black-scholes - , the 35k call 1yr call is about 12.5% likely to get assigned.
This is not correct. The delta of the Black and Scholes model is not the probability of getting in-the-money. There are a few ways of explaining this: - The BS model operates in a risk-neutral framework. The probabilities in the model are not real world probabilities, but risk neutral probabilities, as the pricing comes out of an risk free arbitrage pricing. Hence the delta (the sensitivity of the option price to the underlying price) differs from the real world probability of getting in-the-money
- On a more analytical way, if we look at the price of an option in the BS Formula the delta is N(d1) while the probability of getting in the money is N(d2). In particular we know that as d1 is always greater than d2 also N(d1)>N(d2), hence the delta is always bigger than the probability of getting in the money. This is particularly true for longer dated options and volatile underlings, as both conditions are verified in case of 9 months options on bitcoins, I would be careful with this equivalence.
The way I see it, owning Bitcoin on an ongoing basis is a massive bet for and against a collection of black swans:
This is the best part of your post, and I couldn't agree more. An hedge against a black swan, is the reason I first bought Bitcoin, as I explained in my interview. This is the second best part of your post!
staff
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...I don't use deribit because it's not physically delivered,...
People disregard this as if it means nothing when in fact it means everything! I agree, this deserves more elaboration. Options exist in "physically delivered" and "cash settled" form. Physically delivered works basically like what you would imagine an option to work: To write a call on a Bitcoin someone posts a Bitcoin and writes a contract. At maturity, whomever owns the contract can opt to pay the strike and get the Bitcoin. (Same thing for selling calls, but they'd post dollars and if it gets assigned the contract holder pays the bitcoin and gets the dollars). With cash settlement, the covered Bitcoin may not actually exist, and at expiration if the option is in the money the seller will pay the buyer the difference between the strike and the price. Physically delivered avoids a lot of complexity and risk. Cash settled is essentially a side bet on the price of Bitcoin. With cash settlement you need a "the price", which means you need an index. As a seller of a cash settled option you can potentially get screwed if the index prices aren't reliable-- e.g. someone could buy an OTM option right before expiration, then at moderate cost manipulate the index and force you to pay them a bunch. As a buyer of cash settled options the assets to make good on them may simply not exist in the event of a black swan that turns your position extremely valuable-- potentially resulting in a cascading failure of the exchange. To protect against that risk any exchange engaging in cash settlement will need to have extensive exposure management-- this will automatically force traders to post additional balance if their positions get out of wack. They'll also need to auto-liquidate positions-- potentially profitable ones too. Kind of ironic that when your predictions are right and are moving in your favor you might be liquidated to protect the platform exposure. Platform risk management to users is inherently fairly opaque, traders should be accounting for it in their prices but it's not clear how they can do so rationally without a great deal more information. Any kind of auto-liquidation also disrupts the potential value proposition of options, since part of that value is that you can make a trade once then ride out volatility along the way to the expiration date. So why would anyone ever want to touch cash settled? There are a couple reasons: One is that the settlement process of a physically delivered asset can be inefficient. Say you are super bullish bitcoin-- you bought a bunch of calls, and they're about to expire ITM. Great, but now you need to get a bunch of USD to fund their execution, but you don't have any because you're super bullish on Bitcoin! You can, instead, trade out of the position but the market may not be liquid enough to do this at a good price. In mature markets this is mostly a solved problem: For a modest fee retail brokers will loan you the cash you need for whatever milliseconds it takes to receive the shares and sell them on the spot market. But this is not solved for the Bitcoin options market yet. Another is that regulatory complications make it harder for exchanges to handle USD at all. In a cash-settled options market you can use BTC as your cash, so you can make a platform that is 100% all Bitcoin, no USD (It can even be 100% all bitcoin even when it has options on altcoin/btc). This is also a convenience for customers that don't want USD exposure. Another reason is that since cash settled platforms are inherently having people trade on margin there is no fundamental problem with customers keeping custody of the coins covering their positions in their own wallets. But the flip side of this is that the platform can't guarantee delivery. Cryptocurrency markets and options based on them are already volatile enough that I'm dubious of the belief that market efficiency requires a lot of leverage on these positions. Unfortunately, by their very nature these side bet markets easily generate a lot more volume than physically delivered markets, so to some extent they also may be denying air to the more robust alternatives. Personally, I think cash settled is fraught with long tail systemic risk -- I suppose it has a place in mature and highly liquid markets, but cryptocurrency markets aren't that. I think the risks while clearly large are also not particularly simple or easy to understand-- in theory there is some price where I should be willing to trade at a cash settled market, but I don't believe I could calculate that price.
legendary
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Doomed to see the future and unable to prevent it
...I don't use deribit because it's not physically delivered,...
People disregard this as if it means nothing when in fact it means everything!
hero member
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Enjoy 500% bonus + 70 FS
These particular post really boost the level of my IQ, everything discussing here just look's like film, I don't really know that someone can spend time in preparing such ambiguous and interesting topic that attract attention, how I wish I can be like op via research and construction of topic i won't complain again, infant in recapitulation I so much love these topic because i noticed that is very educating even when you lost attention towards it.
staff
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I think your post might make a better case against using deribit. I use LedgerX -- I don't use deribit because it's not physically delivered, doesn't allow US customers, etc. If he gets exercised on the upside, he's actually losing money in the single trade, but he's probably also making huge money on the whole of his position. This highlights why its not very useful to consider a position without its hedges or what its hedging. E.g. the isolated analysis has you characterize the loss as unlimited-- but for covered positions (which are the only kind of short you can get into on LedgerX) the worst case loss is the value of the collateral minus the premiums you received, which is a very different story. If you were going to hold the collateral for the duration regardless then no loss is possible. The positions I take are a bit wider than you assume-- $7.5k, 5k, or 2k strikes on the put side (which I try to get a premium comparable to a 15-20%/yr on the collateral, depending on the strike/date), and I'm getting more on the call side than you expected: E.g. recent trades have me receiving $2,699/BTC for JUN2021 50k, $6,985/BTC for DEC2021 35k, and $4920/BTC for DEC2021 50K, to give some examples. So lets look at the value at expiration of a position consisting of {2 BTC, -1BTC 35k DEC2021 call, -1BTC 5k DEC2021 put} using some recent trade prices, and compare that to just hodl the same 2 BTC:  In exchange for diminished returns over a BTC price of $42,866, the position gets increased value at all lower prices. Another way to look at is is in terms of ratios of dollar values:  So under a hypothetical crash to $2,866 the position is twice as valuable in dollar terms compared to hodl. If Bitcoin crashed to nothing the position would be worth $2867. Back when I acquired most of my Bitcoin $1,433/BTC would have been considered a fantasy moon price, its a price below the ATH up until May 2017. At the ATH price of (say) $21,000/BTC, the position is 18% better off than hodl and even at $36,953/BTC the position is a respectable 8% ahead of hodl. True, at a super-moon price of $500k/BTC the position is only worth 54% of HODL, but it's still worth 14.28 times its current value at that price. Of course, in the crash situation I'd be better off selling now but we don't know the future. I think crashes and supermoons are certainly possible, but I also don't consider either to be extremely likely in the next year. It's also worth considering in BTC terms:  These trades help avoid regret: If the BTC price crashes the seller (me) at least locked in some income (or, alternatively, gets a lot more BTC), while if the price stays flat-ish this position gets a ~20%/yr return and the seller doesn't need to regret not selling BTC and investing the funds elsewhere. In the moon case the trade limits the returns but there are only so many lambos a person can need (in my case I need exactly zero lambos, but you get the point). I'm pretty bullish on the future Bitcoin price, but I'm also not in dire need of astronomical amounts of wealth. I find it generally more valuable to me to mitigate risk. Even under the most aggressive model of mid term future prices that I find vaguely justifiable-- assuming the future price is a random walk with the same distribution as the returns since 2013 that 35k call is <50% likely to get assigned. Under a more conservative model -- using the derivative of delta at the options premium to get the assignment odds under black-scholes - , the 35k call 1yr call is about 12.5% likely to get assigned. Assuming the price is flat, this trade just yields a extremely respectable 20%/yr from selling volatility (I say extremely because half the btc isn't even 'at risk' when reasoning from the perspective of a hyperbitconized world).
There are a lot of people who seek to profit off volatility in other ways, e.g. day trading the bitcoin spot market. But the fees and taxes from doing that can be considerable and the risk is substantial. Of course there is also custodial risk, though this position only needs to expose half its Bitcoin to third party custody. I've also ignored the tax implications. But I think whatever your tolerance for risk and/or ideas about the future values of Bitcoin say, there is usually a way to use options to get an outcome that better meets your needs. - And yes, Talib would point out that black-scholes assumption of normal returns doesn't have fat tails-- while market history including Bitcoin history does (Bitcoin historical returns are heavily skewed and have mac-truck sized tails).
so he knows he's betting against the "black swans". The way I see it, owning Bitcoin on an ongoing basis is a massive bet for and against a collection of black swans: Owning Bitcoin is a bet for BTC becoming a world currency, fiat hyperinflation, widespread distrust in institutions/monetary policy, and massive globalization of economies (with concordant lack of functional legal process across borders, making irreversible and machine arbitrated transactions more valuable). Owning Bitcoin is also a bet against technical/economic fault destroying Bitcoin's viability, effective adverse regulation denying people access to Bitcoin, Bitcoin businesses being so corrupt or incompetent that they scare everyone away, the collapse of technological society, or Bitcoin not being the solution to the prior list of pro-bitcoin black swans that people adopt. I believe that the current price substantially reflects a balance between these considerations. In general I share the view that these black swans-- both the positive and negative ones-- are credible but at the same time I also believe many people over-estimate their likelihood especially in the short to mid term. So by owning Bitcoin (as well as non-cryptocurrency assets) and selling the BTC/USD return tails I seek to turn the the difference between my beliefs and more extreme beliefs into profit, along with locking in some of those black swan gains now when they can do me some good rather than in some hypothetical future that I might not even live to see. Simultaneously, I believe the marginal value of additional wealth isn't constant-- and so I think there is the potential for mutually beneficial trade even with someone who shares a similar perspective on the distribution of future prices but just has a different risk preference than I do. Aside, I did some image processing magic and managed to make a 'flatter' projection of my bookshelves.
legendary
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I wish I could understand this better but I am a total fool within this field and I would not even know where to start! I will try to re-read gmaxwell's interview and re-read again your post because I feel so stupid that I can't get anywhere around it. Thank you very much for this detailed post, you must have dedicated quite some time to it.
It is not about being stupid or intelligent. It’s about studying certain topics. I dedicated many years of my life to these topics, and now I think I can manage those instruments quite well. It took many years, so don’t think you are stupid because you don’t understand this at the first read. Actually, a stupid person would think they have learned “all they wanted to know about option” from this thread!
legendary
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I wish I could understand this better but I am a total fool within this field and I would not even know where to start! I will try to re-read gmaxwell's interview and re-read again your post because I feel so stupid that I can't get anywhere around it. Thank you very much for this detailed post, you must have dedicated quite some time to it.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
In the past days, Greg Maxwell has been interviewed on the forum. You can read the full interview here , it is really an interesting interview, perhaps the most interesting read so far, I strongly recommend reading the whole of it. As far as this thread is concerned, there is a special passage that is relevant: I trade options on Bitcoin at LedgerX with a portion of my stash. Most of my trading could be characterised as selling moon insurance (deep out of the money calls) and crash insurance (deep out of the money puts). For the most part, the activity hedges my substantial Bitcoin exposure-- and it more than covers all of my living expenses which gives me peace of mind. I've averaged a ~20%/yr return on investment (not including Bitcoin's gain in value, of course) since I opened the account in December 2017.
I think more people trading Bitcoin should be interested in options: They can be used to better reflect the kinds of opinions people have about Bitcoin's price and can be shaped to better match people's risk tolerance. For people who want more risk options (esp physically delivered ones like LedgerX) can be a lot safer than the leveraged Bitcoin products traded elsewhere. They can also be more tax efficient.
In the following post I will try to analyse Greg's strategy from a technical point of view. For the moment I will abstain from the "tax efficient part" as it has a lot to do about very specific details of Greg's position I don' know and I can't guess about. Maxwell's strategy is called "short strangle": that is the sale ("go short" means to sell something) of a "strangle" that is an option strategy composed of a put option and a a call option with the same maturity on the same underlying. Example: Short a 20% delta Six months Strangle I tried to create this strategy using Deribit Options, as he referenced them on the thread. He never mentioned 20% delta or six months time horizon, these are just working hypothesis. So, trying to find out the options as close as possibile to the desired delta level I found those two: Sell 1 44,000 CALL Strike K=44,000 expiry 25 Jun 2021 for 0.0594 BTC Sell 1 14,000 PUT Strike K=14,000 expiry 25 Jun 2021 for 0.0681 BTC This means cashing in 0.1276 between 14,000 and 44,000 being exposed to unlimited losses on the extreme movements. Bear in mind that currently the BTC Jun futures trades at 20,290 The position details are the following: |  | | Pic.1 Details of the two options in Greg Portfolio with details of the position's greeks.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
 Bitcoin price volatility expected as 47% of BTC options expire next FridayThe open interest on Bitcoin (BTC) options is just 5% short of their all-time high, but nearly half of this amount will be terminated in the upcoming September expiry.
Although the current $1.9 billion worth of options signal that the market is healthy, it’s still unusual to see such heavy concentration on short-term options.
By itself, the current figures should not be deemed bullish nor bearish but a decently sized options open interest and liquidity is needed to allow larger players to participate in such markets. https://cointelegraph.com/news/bitcoin-price-volatility-expected-as-47-of-btc-options-expire-next-fridayLet's see how BTC works out the move throughout the week. The little snip that you provided, VB1001, mentions that the options largely provide a means for BIGGER players to get into BTC, but from the underlying, neither a bullish nor bearish determination can be assessed. <...> Reading the supposed market direction from Metrics like Open interest, or strike distribution or some other “static” data from options market has always been an art well beyond my understanding of such market. There is such a variety of players, trading styles or trade rationale that could produce exactly the same outcome on such metrics, that I always giggle when someone try to sell you a “recipe” to navigate trough option expiry. As @VB1001 and @JayJuanGee pointed out, skepticism is a must in these cases, as junping to conclusion coul put on the wrong side of the market on expiration day.
legendary
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Self-Custody is a right. Say no to"Non-custodial"
I suppose that there might be some BIGGER players that might want to attempt to play the BTC market and use options as one of their tools to attempt to play the market, but even the recent statement from Michael Slayor and his purchase of more than 38k BTC in the past several weeks, his assessment was that he was surprised that even his relatively large purchase of $425million in BTC in a relatively short period of time was able to be accomplished without a lot of BTC price slippage.... which surely is a sign that BTC prices are likely requiring more and more commitment of capital in order to even attempt to manipulate the prices I think the way Saylor made the purchase helped the market not to make any sudden movements in the price. To acquire 16,796 BTC (disclosed 9/14/20), we traded continuously 74 hours, executing 88,617 trades ~0.19 BTC each 3 seconds. ~$39,414 in BTC per minute, but at all times we were ready to purchase $30-50 million in a few seconds if we got lucky with a 1-2% downward spike. https://twitter.com/michael_saylor/status/1306940165160656897Of course, anyone who intended to buy on various exchanges (rather than OTC), as far as we know, would want to buy in such a way to attempt to both minimize upward price slippage and also to take advantage of any BTC price dips that might be inclined to take place during their BTC buying period. Some might also argue that any large entity adding that quantity of BTC to their investment portfolio would be serving as a kind of BTC price support - which sort of implies that the BTC price may have fallen a bit more, absent such additional buying support. Surely, the price support theory is considerably speculative since we have difficulties, in the real world, to really compare the difference between what would have happened to the BTC price absent the more than 38k BTC accumulation that Microstrategy employed.
legendary
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<>
I suppose that there might be some BIGGER players that might want to attempt to play the BTC market and use options as one of their tools to attempt to play the market, but even the recent statement from Michael Slayor and his purchase of more than 38k BTC in the past several weeks, his assessment was that he was surprised that even his relatively large purchase of $425million in BTC in a relatively short period of time was able to be accomplished without a lot of BTC price slippage.... which surely is a sign that BTC prices are likely requiring more and more commitment of capital in order to even attempt to manipulate the prices I think the way Saylor made the purchase helped the market not to make any sudden movements in the price. To acquire 16,796 BTC (disclosed 9/14/20), we traded continuously 74 hours, executing 88,617 trades ~0.19 BTC each 3 seconds. ~$39,414 in BTC per minute, but at all times we were ready to purchase $30-50 million in a few seconds if we got lucky with a 1-2% downward spike. https://twitter.com/michael_saylor/status/1306940165160656897
legendary
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Self-Custody is a right. Say no to"Non-custodial"
 Bitcoin price volatility expected as 47% of BTC options expire next FridayThe open interest on Bitcoin (BTC) options is just 5% short of their all-time high, but nearly half of this amount will be terminated in the upcoming September expiry.
Although the current $1.9 billion worth of options signal that the market is healthy, it’s still unusual to see such heavy concentration on short-term options.
By itself, the current figures should not be deemed bullish nor bearish but a decently sized options open interest and liquidity is needed to allow larger players to participate in such markets. https://cointelegraph.com/news/bitcoin-price-volatility-expected-as-47-of-btc-options-expire-next-fridayLet's see how BTC works out the move throughout the week. The little snip that you provided, VB1001, mentions that the options largely provide a means for BIGGER players to get into BTC, but from the underlying, neither a bullish nor bearish determination can be assessed. You, VB1001, seem also to be guarded in terms of trying to figure out if there might be a direction one way or another that might be incentivized by the end of the week expiration of the outstanding options. I suppose that there might be some BIGGER players that might want to attempt to play the BTC market and use options as one of their tools to attempt to play the market, but even the recent statement from Michael Slayor and his purchase of more than 38k BTC in the past several weeks, his assessment was that he was surprised that even his relatively large purchase of $425million in BTC in a relatively short period of time was able to be accomplished without a lot of BTC price slippage.... which surely is a sign that BTC prices are likely requiring more and more commitment of capital in order to even attempt to manipulate the prices whether we are referring to attempts to take advantage of options bets or some other tool that some BIGGER players might attempt to deploy to make money based on BTC volatility or possible abilities to cause BTC to be more volatile than some traditional (longer history) asset classes. I am not really attempting to proclaim any kind of knowledge either regarding how option expiration dates might play into possible BTC price movements, but surely it should not hurt to have knowledge of this kind of data for those nerds, like yours truly, who spend a decent amount of time each day looking at whether BTC prices have gone up or down - over various snapshot periods of time. 
legendary
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<>
Bitcoin price volatility expected as 47% of BTC options expire next FridayThe open interest on Bitcoin (BTC) options is just 5% short of their all-time high, but nearly half of this amount will be terminated in the upcoming September expiry.
Although the current $1.9 billion worth of options signal that the market is healthy, it’s still unusual to see such heavy concentration on short-term options.
By itself, the current figures should not be deemed bullish nor bearish but a decently sized options open interest and liquidity is needed to allow larger players to participate in such markets. https://cointelegraph.com/news/bitcoin-price-volatility-expected-as-47-of-btc-options-expire-next-fridayLet's see how BTC works out the move throughout the week.
legendary
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Interesting times in the Options space after the PUMP. Price moved up sharply in the last weeks, and this had some impact in the Options World. First a recognition of Open Interest and Volume across the exchanges: |  |  | | Open Interest. Please Note Axis starts at 500 $ mios: the red part is way greater than appears.
legendary
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I wanted to update this thread for the last few days, but I procrastinated due to holiday seasons. But when I read this news I decided I couldn't stay silent: No One Has Traded Bitcoin Options on Bakkt for Over a Month: Deribit Continues to Dominate- Open interest for the exchange’s options market has suffered complete inactivity before, but the current 38-day streak dwarfs other periods.
- Bakkt's options volume has also dropped to $0 since April 23, according to Skew.
- Bakkt declined to comment when contacted by CoinDesk.
In the article there are sad picture like those: |  |  | | BAKKT Open Interest
legendary
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Great update, if open interest is predominant in the 10-16k BTC price range, the traditional interpretation is to conclude that the market sentiment is slightly bullish.
<...>
Agree, you are right, slightly bullish is the best definition of current market sentiment. One thing that I would further highlight from your message is that long call spreads, which are for sure a great part of this total OI, aren't detected, as both options (one bought and one sold) are contributing increasing the OI. I am not sure a covered call writing (shorting a call to cash the premium, while hodling the underlying) is a bullish strategy, rather than one pointing to a stability in price (given the long delta, short vega exposure). But this is very technical, it really depends on which option you sold. Secondly, it is true that the option plays are bullish, but market makers learnt, after the March crash, how to price the puts. |  | | Skew is a measure of the difference, in volatility, of Puts - Calls
legendary
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Just a little update from skew.com, as the next option expiry, on Jun 26 is going to be huge.
Open interest is at historical high, nearly 1.8 billions, by far the highest in BTC options history.
CME took a decent share of it: 25% is huge.
To put that in relative terms, bear in mind that currently BTC options are roughly 1% of all BTC derivatives, while this percentage is almost 60% in traditional markets.
...
One thing to notice is that open interest tells us that there is an open position in the market, but nothing on which side the position is open.
A contract is open both if it is bought and if it is sold.
So the Open Interest tells us where the "bulk of the contracts" is, but it doesn't tell us the direction, that is, if there have been more "buyers" or more sellers ".
Well, but if one has bought the other has sold, you will say.
Well, sure, but the two "sides" of the trade are often made up of two "players", with a totally different style of play.
...
Great update, if open interest is predominant in the 10-16k BTC price range, the traditional interpretation is to conclude that the market sentiment is slightly bullish. Most option contracts are traded out of the money, by virtue of the intrinsic philosophy of most options strategies, so 10-16k high open interest almost certainly means high concentration of OTM call options. Most of these, I guarantee, are either initiated as naked long call options (and delta long spreads), or Long BTC hedged by short call option premium (or various combo strategies derived from similar reasoning which we might get into later if there is more interest on this thread), thus the currently increasing volume in the BTC option markets is indicative of bullish sentiment.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
Just a little update from skew.com, as the next option expiry, on Jun 26 is going to be huge. Open interest is at historical high, nearly 1.8 billions, by far the highest in BTC options history. CME took a decent share of it: 25% is huge. To put that in relative terms, bear in mind that currently BTC options are roughly 1% of all BTC derivatives, while this percentage is almost 60% in traditional markets. |  |  | | Open Interest is at historical high. Care the vertical axis: deribit his bigger than it appears
legendary
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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. 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: 
hero member
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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.
legendary
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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 volatilityThis 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?
legendary
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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.
jr. member
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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)
legendary
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Well, skew.com made a a couple of interesting tweets about the options, almost confirming what I analysed above: Six weeks later, bitcoin implied vol is nearly back to its pre sell-off level
 https://twitter.com/skewdotcom/status/1254680478482944000?s=20As I said in the previous message, we see volatility has returned to pre-crash values. Another one quite interesting: However, skew remains positive. Will this be a structural parameter change?
 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!
legendary
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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!)
legendary
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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] Binance’s performative social media “leak” revealed options trading support as one of the items on a “what to test” list, which included other products that have previously been officially announced, such as the Binance Card issued by Visa.
As a popular derivative that enables traders to hedge against asset price swings in either direction, an options contract offers the chance to purchase either a right to buy (a call option) or sell (a put option) a given asset at a specified “strike price.” This strike price is determined on or before the contract’s expiration date.
Quite interesting to me is that Cointelegrph stressed the "hedging" argument to explain the options trading rather than the "leveraged gambling tool" one.
legendary
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Decentralization Maximalist
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!
full member
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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.
legendary
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This post is eligible for my project: I am a strong believer in the utility of local boards.
I am lucky enough to be able to express myself in at least a couple of languages, but I know this is not the case for everyone.
A lot of users post only in the local boards because of a variety of reasons either language or cultural barriers, lack of interest or whatever other reason.
I personally know a lot of very good users (from the italian sections mainly, for obvious reason) who doesn't post in the international sections.
I think all those users they are missing a lot of good contents posted on the international (english) section or on other boards. If you think you can help here, just visit the thread!
legendary
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<...>
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.
hero member
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Word of caution.
Options are a very complicated topic.
I tried my best effort to explain this topic in the most simple and intuitive way.
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?
legendary
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<>
Effect of CME Futures Options on BTC Price Depends on HalvingIt shows the confidence CME has in the Bitcoin market
CME, as a multi-billion dollar derivatives company, has no incentive to push for Bitcoin options and other investment vehicles if there simply is no traction or demand from the market. As the company’s executive Tim McCourt said, CME’s Bitcoin futures market facilitated around $270 million per day:
“We’re pleased our CME Bitcoin futures have rapidly evolved over the last two years to become one of the most liquid, listed Bitcoin derivatives products in the world, averaging nearly 6,400 contracts (equivalent to 31,850 Bitcoin) traded each day in 2019.”
31,850 BTC at the current price of $8,500 is equivalent to $270 million and that is similar to the spot volume of major exchanges in the global market. https://cointelegraph.com/news/effect-of-cme-futures-options-on-btc-price-depends-on-halvingAccording 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.
legendary
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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.phpconfirms 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.
legendary
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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:
Short on deribit for $77 + long on ftx for $41? Arbitrage anyone?
  https://twitter.com/ceterispar1bus/status/1218639096853086208?s=21What 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.
legendary
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Skew. com has finally added CME to their Open Interest Monitor for Bitcoin Options: Just added CME to our bitcoin options open interest radar 📡
Market on aggregate has already filled the gap from the December expiry
Growing!  https://twitter.com/skewdotcom/status/1219545917671530496?s=20This 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 $5.3MBitcoin (BTC) options from CME Group more than doubled their traded volume in the first week after going live, data shows.
According to figures supplied by the company, Bitcoin options volumes skyrocketed in the seven days since they went live on Jan. 13.
BTC futures options surge higher
As of Jan. 17, volume was 122 contracts, worth 610 BTC ($5.27 million). By comparison, on day one, volume was 55 contracts, or 275 BTC (currently worth $2.37 million).
Open interest on options stood at 219 contracts on Friday, equivalent to 1,095 BTC ($9.45 million).
legendary
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Anyway apparently everyone (but Bakkt) is trading options now! We crossed 3000BTC options volume in the last 24 hours! We are excited for the growth of the options market in 2020, and will continue to build FTX into the best place to trade them. 24H volume added to the top of the chart: https://ftx.com/optionsIn this graph a recap of volumes: In the last day, both
@CMEGroup
and
@FTX_Official
, two well-known but vastly different exchanges which both offer crypto asset derivatives, launched their #Bitcoin Options product. /1
https://twitter.com/AmunAG/status/1217041230829408256?s=20 Word of caution: Options Volumes are quaite an irrelevant metric. Open Interest is a more intresting metric, and also is very easy to "manifacture" appealing metrics.
legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
LOL someone really bought 250$ a call for $10 000 in february?  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). 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 are only the Privately Negotiated Trades(PNT) according to this CME table 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.
legendary
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legendary
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Fully fledged Merit Cycler - Golden Feather 22-23
Quite a successful start for Bitcoin options trading at the CME: CME Bitcoin Options Trade $2.3M in Debut, BTC Price Hits 2-Month HighBitcoin (BTC) futures options from CME Group saw volumes in excess of $2.3 million on the product’s first day of public trading, the company has confirmed.
Data from CME’s official website confirmed the successful rollout on Jan. 13, which began as scheduled and ultimately saw 55 contracts change hands. On an andedoctical record, there are the structures traded according to skew:
Looks like 55 contracts went through on CME's BTC Options first day of trading, approx. $2.3mln notional.
100% were Calls.
Source: CME (preliminary estimates)
https://twitter.com/skewdotcom/status/1216867057670795267?s=21
legendary
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Finally CME released a statement on Bitcoin Options: Options on Bitcoin futures are now live A new way to manage bitcoin exposure is here Options on Bitcoin futures are now available to trade on CME Globex, providing a new way for traders to diversify their trading strategy and manage bitcoin exposure. Based on actively traded Bitcoin futures, our new contract offers a cost-efficient tool to hedge uncertain markets. Bitcoin options at a glance: Regulated Reference Rate Track to the regulated and robust CME CF Bitcoin Reference Rate Counterparty risk mitigation Reduce counterparty default risk through CME Clearing Greater capital efficiency Save on potential margin offsets between Bitcoin futures and options Limited-time fee discount Effective through February 29, exchange fees for options on Bitcoin futures will be discounted by 50%. View fee schedule. Learn more about options on Bitcoin futures, including Frequently Asked Questions and contract specifications. Teey also released a quite interesting video: Trader's Edge video: options on Bitcoin futures
Join Dave Lerman as he walks through the highlights of the Bitcoin options contract, the importance of volatility, and the factors behind the success of the underlying Bitcoin futures in 2019.
Trader's Edge: Options on Bitcoin Futures
9 Jan 2020 By Dave Lerman Topics: General Education
Join Dave Lerman as he begins 2020 with a new Trader's Edge video, covering the January 13th launch of Bitcoin options.
This nine minute video covers:
The factors behind the success of the underlying bitcoin futures in 2019
Options Contract Highlights
How to use the QuikStrike tool for analysis of bitcoin options
The importance of volatility with options on bitcoin
 Watch it here: Trader's Edge: Options on Bitcoin Futures
legendary
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Some more detail on FTX. Crypto Derivatives Exchange FTX Launched Bitcoin Options TradingCryptocurrency derivatives exchange FTX has launched Bitcoin (BTC) options trading on Jan. 11.
FTX CEO Sam Bankman-Fried announced in a tweet yesterday that options were listed on the trading platform. Furthermore, later the same day he also claimed that options trading volume on the exchange reached $1 million in about 2 hours.
legendary
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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!
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legendary
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Gentle reminder: today CME is starting to trade option: CME’s Bitcoin Options Launch Today, Here’s What To ExpectCME recently announced the launch of its newest product that will allow customers to trade options on Bitcoin futures. It’s scheduled for release today, January 13th. Some believe that it will attract further attention from institutional investors.
In fact, a group of JP Morgan analysts, led by Nikolaos Panigirtzoglou, expressed their views on the matter. He noted that the total interest towards CME has grown with almost 70% from year-end. This could be coming as a result of the options contracts:
“There has been a step increase in the activity of the underlying CME futures contract. This unusually strong activity over the past few days likely reflects the high anticipation among market participants of the option contract.”
It’s worth noting that Bakkt, the Bitcoin Futures trading platform of the Intercontinental Exchange (ICE), previously launched Bitcoin’s monthly options. Panigirtzoglou acknowledges this, but he doesn’t consider Bakkt’s volume to be sufficient enough at the moment, calling it “rather small.” The researchers believe that since CME has been more dominant in the Futures market, its options on Bitcoin will have a more significant impact.
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!
legendary
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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.
legendary
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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.
legendary
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sr. member
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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.
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.
hero member
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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.
legendary
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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
legendary
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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.
legendary
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Looks like a great summary of options, OP, though I didn't read the entire thing.
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Great stuff, fillippone.
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Options are a difficult instrument to trade. This is true on traditional markets, but this is even more true in a wild market like bitcoin.
TL:DR, but I love this statement. People should not doing option trading because it is more complicated, much harder and more risky than spot trading. <...> Thanks you guys for the appreciation! Yes, it was a long thread to read, but rest assured it was even longer to write! As I had to try to figure out the most important things to describe and explain, please let me know via comment which aspect you want me to dig a little bit more!
hero member
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Well, it really is a useful knowledge. Now I understand why you have a huge amount of merit after 1 year of activity on this forum. I admire your understanding, I have just learned about the trading options recently, some of the options you have given here are completely new with me. Thanks for your great contribution, not only me but others also need topic like this from you. We have a big picture here to admire and learn.
sr. member
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Wow, I really admire your understanding. I confess I am a young person and I often learn about the indicators to make money and rarely learn about the volumes of Bitcoin or the options. Now, after reading the entire article, I realized that this is a way for us to look at the whole picture of the market and look further. Thank you for taking the time to create this article so that everyone can understand more about Bitcoin.
sr. member
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Options are a difficult instrument to trade. This is true on traditional markets, but this is even more true in a wild market like bitcoin.
TL:DR, but I love this statement. People should not doing option trading because it is more complicated, much harder and more risky than spot trading. It would be good to make this as a 'warning' cause we don't want people to lose their money at any trading. If anyone wants to try this, they must be ready for everything that could happen during the journey.
legendary
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Great stuff, fillippone. I've been trading for nearly a decade and I've always avoided options due to the complexity underlying their market pricing. It'll take a while for this to sink in but I really appreciate the breakdown.
legendary
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Looks like a great summary of options, OP, though I didn't read the entire thing. I never traded options in the stock market and don't have any interest in doing so with bitcoin, so I pretty much know all I'm ever going to need to know about them--and options/futures/derivatives never interested me all that much. I'm of the Warren Buffett school of thought, whereby it's better to own a stock or bond or whatever rather than a derivative of the same.
But I'm sure there are people here who don't really know what options are all about, and it's good that you created this nice summary. It definitely gives you an idea of what goes on at places like Bakkt and the CME.
hero member
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This is really cool and I have to admit that this is one of the greatest things that has happened in the cryptocurrency community, though I have seen some news that relates to Bakkt that once made me lose interest in them, but as time goes on we will get to know the truth.
Option trading is really good and this is not the first time that I have been part of it, I have always made use of Robinhood platform which was a really good choice since it’s a free and no commission platform. There are also other good platforms that I have known, I stopped option trading a long time , but I’m looking back into it.
legendary
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Deribit BTC Options Buy/sell Ratio This graphs details if the trades happened on the buy side (asks lifted) or on the sell side (bids given). Again, it's difficult to understand the final positioning looking only at this kind of graph, but a shift in the current state of ratio can signal a shift in general sentiment. Of course, buys and sells should add to 100%. This is not the case in this graph I have no idea why, sometime the sum is below 100% or sometime is even bigger than 100% (on both case there's a white space above to get to 100%). Deribit BTC Options Short-term/Long-term Ratio This graphs again splits the total trades between short term options and long term options. There's no hint on what they mean by short term, but the fact that short term options are more actively traded could potentially mean the trading aspect of those instrument, as opposed to hedging purpouse, has more appeal to traders. Total BTC Options Open Interest AS i detailed on my thread on future ( Everything you wanted to know about BTC futures but were afraid to ask!) Open Interest is a concept often confused with volume. In reality open interest specify the amount of "Open Positions" on the exchange, or the sum of positions that will ultimately could potentially lead to a future settlement. From here we see again that Deribit is by far the most important exchange, with LedgerX and Bakkt Barely noticeable. Again, I do expect this to change in the near future. BTC Options Open Interest by Strike (kBTC) This graph breaks down the Open Interest by the various strikes each position is written on. Looking at this chart we have a glimpse of the strike levels where lies the more interest of the markets. Also, near expiries, large open interest position could act as "magnets" or "barriers" to BTC price, because the hedging positions of option market participants (even thou the total option volume should be a few times bigger to impact hte more liquid spot BTC market). BTC Options Open Interest by Expiry(kBTC) Same as of above, this time the Open Interest is split by the various expiries. Looking at this chart we have a glimpse of the maturity where lies the more interest of the markets. BTC Jan20 Vol As we have seen in the OP the volatility level is not constant for each strike. Here this graph tries to model an implied volatility skew out of the quoted prices. On the call side (the blue lines) we see the prices being consistently narrow, while on the puts the spread is narrow where the options are in the money, while it widens considerably for in the money puts. As the most actively traded options, i.e. the ones we can expect to have more reliable prices, are the out-of-the-money options, these options are the one we consider to fit a volatility smile: so on the right hand of the graph we use the call implied volatilities, while on the left part of the picture we use the puts implied volatilities. As you can see the sum of the two curves, represented by the black dotted line, is quite well shaped. Back Months Vol Vol These graphs are conceptually identical to the previous one, but they are actually reporting the implied volatilities on back months, or longer expiries. As traded volumes and liquidity here is lesser, the graphs are not really well shaped: basically there are no reasonable offers for many puts, so the Y-axis explodes causing the graph to be actually unreadable.
legendary
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A nice tool to monitor the options market is the dashboard provided by skew.com: Bitcoin Options Dashboard by SkewI will try to explain how to interpret the various graphs. BTCUSD Spot Nothing to see here, a simple graph on a linear scale. Pretty Standard, just to orient ourself checking the other graphs. BTCUSD Realised Volatility We already saw this graph in the OP: this is the historical bitcoin volatility, computed using different time horison. We already noticed the realised volatility observed over longer periods tends to be more stable. BTC Options Volumes In this graphs we see the trading volumes of all options on the different exchanges. We see the vast majority of options has traded on Deribit. I think this is going to change with the launch of the two biggest exchanges BAKKT and CME. Bakkt has actually already launched, but it is barely noticeable. We already noticed Bakkt is a slow starter, but when he got his product rolling, they were slowly grinding volumes. BTC ATM IV This graphs is similar to the historical volatility one, but instead focus on the Implied Volatility. They compute the implied volatility of an at-the-money option (strike price euqalt to forward price of bitcoin) expiring at various tenors: 1m, 3m and 6 months in the future. So this represent the future expected volatility of bitcoin over such horizons. We notice that implied volatility is moving more for shorter term options, and its more stable for longer tenor options. BTC 25d Skew This charts start giving out very technical infromations. This measures the difference in implied volatility terms between two options maturing on the same date. The lines measure the difference in implied volatilites between an out of the money call and an out of the money puts. Both options are chosen with a strike having 25% delta (hence the 25d in the chart title). So the strikes are not fixed in dollar terms, but in "moneyness" or "distance" from the current market levels, so the measure is consinstent over the various market phases. A positive number means call Implied volatility is higher than the put volatility, this means volatility is expected to rise in an upward movement (probably more people wants to buy upside options because want to leverage the price of bitcoin. BTC ATM Volatility Structure This is the level of implied volatility of the options expiring at the various dates expressed below. This gives a similar information as the BTC ATM IV graphs (and informations are actually consistent), losing the historical part , but giving more informations on the expiries, axpressed as fixed dates r(probably expiries dates at the various exchanfges) rathr than "rolling dates (1m, 3m and 6m). Probability of BTC being above x$ per Maturity This is a tricky one. I don't knwo the details of the calculation of this graph, but I think it is greately misleading. The shape of the graphs looks very like the delta of an option with a given strike. Delta of an option can be tought as the risk-neutral probability of an option of being in the money. Well, the kew is that one: risk neutral probability are very different from real world probability. So, O dosmiss this graph as "manure". Please don't draw conclusion from that particular piece of information. BTCUSD - Implied Volatility vs Realised Volatility, Daily This is a very intresting graphs. It combines the realised volatility with the implied volatility over the same horizon: so this graph answers the following quiestiins: "Which level of volatility are markets pricing in, compared to the one they observed in the past?". The graph plots the volatilites over a 3m horison: currently the Implied volatility is pricing above the realised: market are currently expecting volatility to go up on the next months (probably due to the halving event in 5 months). Deribit BTC Options Volumes Pretty straightforard graph. This is the volume of traded options today on deribit. Please not that this is the notional of the options, not the sum of the premium paid. Deribit BTC Options Flows This graph details if the sign of the flow, buy or sell, and the type of option call or put. Of course for every trade there is a buyer and a seller, but when a trade happens on the ask side of the price it's conventionally clasified as a "buy", while when a trade happens on the bid side ofthe market it's called a "sell". We see that the majority of trades are on the call side (this is actually intresting) without much imbalance between buy and sell, so a nice, liquid two ways market. Trade >50 BTC Option Monitor This graph is actually a blotter of the trades that happened on the exchange. Most relevant trades are highlighted. Can give a sense of how the big swinging dicks are trading, but it is always very difficult to extract meaningful information from those blotter without having a complete view of the position under management (i.e. buying 500 BTC put as leverage trading, is vert different buying 500 BTC put becasue you are also long 1000 BTC and you want to protect from the downside). Deribit BTC Option Call/Put Ratio Put Call Ratio is the ratio of the trades on Calls versus the trades on the Put. Again, it's a graph very common amonsgt traders, but with limited or very diffciult information value, in my humble opinion.
legendary
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Options on bitcoin have been accessible only to whales and on very specific exchanges as Deribit, but when Bakkt and CME, the two main traditional bitcoin exchanges will open the products to their clients option trading in bitcoin will become more widely accessible. Actually, options trading has been available on Bakkt since December 9th, while CME will launch a similar product later this month, starting trading from January 13th. Options are a difficult instrument to trade. This is true in traditional markets, but this is even more true in a wild market like bitcoin. With this thread, I will try to give a few theoretical and practical hints on how to understand, price and use options. I will start detailing what an option is, explaining all the characteristics of the options and what they mean for the investor. Then I will briefly explain how to price them. I won’t explain the details of the mathematical model used to price those, because it would imply some advanced differential calculus nobody wants to hear about. What I will try to do is to convey what factors have an impact on option price and how to interpret those. I will also try to clear the field from some common misconceptions about options. Last I will explain a few common strategies for options trading. Nothing too complicated, just a few examples on how to use them according to investment purpose: be it speculation or hedging.
INDEX
What is an optionAn option is a contract that gives the holder the faculty, but not the obligation, to trade an asset, called the underlying asset, before the expiry, the termination date of such contract. The option that gives the holder the faculty to buy the underlying asset is called call option. The option that gives the holder the faculty to sell the underlying asset is is called a put option. The price at the trade will happen is called the strike price. When an option generates a trade then we say it is "exercised", otherwise it simply ends without any trade put in place we say it is "abandoned". If an option can be exercised only at the termination is called European Option, while if it can be exercised anytime before the termination is called American Option. The price the buyer of the option pays to the seller, or the writer of the option, is called the premium. If the market price is above the strike price, the call option is called "in-the-money", because in the case of American exercise it could be exercised with profit. Otherwise, the call option is called "out-of the-money". If the market price is below the strike of the put option, the put option is called "in-the-money", because in the case of American exercise it could be exercised with profit. Otherwise, the put option is called "out-of-the-money". If we look at a certain strike then, only call options or put option can be in-the-money, not both of them. For example, if we look at 10,000 strike options, the calls are now out-of-the-money, while puts are in-the-money. At expiry, if the option can generate the underlying asset what has been priced is called “physical delivery”. Many commodity or financial options are physically settled. Alternatively, an option can regulate only the cash equivalent of the profit exercising the option itself: that expiry then an in-the-money option would deliver the buyer a cash amount equal to the difference between the asset price and the strike (in case of a call option) or the difference between the strike price and the asset (in case of a put option). In this case, the option is called cash-settled. In the case of Bitcoin options, namely the Bakkt options on BTC futures, the option is physically settled: at the expiry of the option the in-the-money option generates an appropriate position in the underlying future. There’s only a peculiarity: as it is common on many commodity options, the option itself expires a few days before the future, so the holder of the in-the-money options has the possibility to close the future position before the actual delivery of the underlying of the future (the option has the future as underlying, the future has the bitcoin as underlying). This is why you probably heard some marketing nonsense where “Bakkt options allow you to choose the type of delivery: physical or cash)". Before analysing mathematically how to price an option, let’s see that impact the pricing with the intuition. STRIKE: The first element is the strike. Of course, the difference between the market price and the strike is the first hint at the value of an option. Intuitively the more an option is in-the-money, then the more such an option must have value. When an option is in-the-money, such an option has intrinsic value. For both call and put options, the intrinsic value is equal to the difference between the underlying price and the strike price: intrinsic value only measures the profit as determined by the difference between the option's strike price and market price. When an option is out-of-the money instead, the intrinsic value is zero. The intrinsic value is the minimum value of an option: if the value of an option would be less than the intrinsic value, could be arbitraged, buying that option and exercising it to profit. So when BTC is trading at 7,000, a call with strike K = 5,000 is in-the-money and has an intrinsic value of 2,000, so the price must be greater than that. At the same time, a call with a strike K =10,000 has no intrinsic value, so the intrinsic value is zero. Of course, intrinsic value is only a part of the pricing of an option: other variables impact the option pricing each one of them adding value to the intrinsic value getting the final value of the options: TIME TO EXPIRY: the second most important element when pricing an option is the time to expiry: the longer the time to expiry, the dearer the option. If we price two options with all characteristics being equal, but the exercise date, the one with the exercise date the furthest away, will have the greater price. VOLATILITY: the greater the volatility of the underlying asset, the greater the value of the option. Here the explanation gets a little bit tricky. Let’s say that the main reason it is not the greater the volatility of the underlying, the greater the possibility of the underlying going in-the-money. We will see later why this is important, just take in mind that is not obvious. The option buyer doesn’t profit from the option going in-the-money. Rather don’t profit only if the option goes in-the-money. The buyer of the option benefits just because the underlying asset moves (i.e. it is volatile) under a risk-neutral approach, i.e. without taking the “risk” of profiting because the option goes in-the-money. Let's see an example: We buy a call option on BTCUSD, with a strike price of 8,000 USD, expiring in June 2020. The strategy is named Long call because buying something is called being " long" in finance jargon. The premium for this option is 1,350 USD, we have to pay immediately (" upfront", again in finance jargon). Fast forward to option expiry. The outcomes of our option differ according to the final price of bitcoin: If BTCUSD is below 8,000 USD the option is abandoned, it expires worthless. If BTCUSD is above 8,000 USD the option is exercised, and generate a payoff equal to the difference (positive) between BTCUSD and the strike price. In more formal terms the call option payoff is the following: Call=max(0;Spot-Strike) The final payoff of the strategy will be the following:  Note that this graph considers we paid a premium of 1,350 USD upfront, the premium must be paid in every scenario: if the option expires worthless the P&L (Profit&Loss) of the strategy is negative and equal to the premium paid, otherwise is equal to the option payoff netted with the premium paid. Note that the P&L starts increasing at the strike price level, 8,000 USD in this case, but breaks even at a higher level equal to the strike + the premium plaid, or 9,350 USD in this example. Let's see the same thing for a put option. We buy a put option on BTCUSD, with a strike price of 6,000 USD, expiring in June 2020. The strategy is named long put. The premium for this option is 732 USD, we have to pay " upfront". Fast forward to option expiry. The outcomes of our option differ according to the final price of bitcoin: If BTCUSD is above 6,000 USD the option is abandoned, it expires worthless. If BTCUSD is below 6,000 USD the option is exercised, and generate a payoff equal to the difference (positive) between the strike price and the BTCUSD. In more formal terms the put option payoff is the following: Put=max(0;Strike-Spot) The final payoff of the strategy will be the following:  The graph looks familiar, as it is the symmetrical payoff than the call. Note that this graph considers we paid a premium of 732 USD upfront, the premium must be paid in every scenario: if the option expires worthless the P&L of the strategy is negative and equal to the premium paid, otherwise is equal to the option payoff netted with the premium paid. Note that the P&L starts increasing at the strike price level, 6,000 USD in this case, but breaks even at a lower-level equal to the strike - the premium plaid, or 5,267 USD in this example.
Let’s have a look at an options exchange looking for confirmations. All the examples are from Deribit, who is the only widely available source for option prices: creating an account is easy and don’t require KYC. If you are interested to do it for educational purposes. Of course standard disclaimers apply and I am not by any mean linked to that exchange. If we select BTC options, and then 26 Jun 2020 we will find a screen like the following:  (click on the image to enlarge it)This particular page considers the options maturing on 26 Jun 2020. The centre grey column represents the strike levels. The options on the same row share the same strike price. On the left of that column, we have the call options for each strike, while the puts are on the right-hand side. The bid price is the price where other participants want to buy the options, i.e. the price you have to sell at if you want to sell it. The ask price is the price where other participants want to sell the options, i.e. the price you have to pay for if you want to buy it. Each bid and ask price has a corresponding Implied Volatility level, that is the volatility level that, if inputted in the model, gives back the aforementioned price. This is why speaking of options, volatility and price are exchangeable concepts. As we saw earlier, we see that the calls have a diminishing price when the strike goes up: the 6,000 call has a mid-price (the average between the bid and the ask) of 0.29725 BTC, while the 10,000 call has a mid-price of 0.11275 BTC. The opposite is true for the puts. The puts with lower strike have lower premiums. The put stuck at 10,000 has a price of 0.46075 BTC, while the 6,000 put has a mid-price of 0.09725 BTC. Also, we can see that examining options with greater time to expiry each option has a greater value: the 10,000 USD strike call maturing in September has a value of 0.16775 BTC versus the value of 0.11275 of the same option maturing in June. The 6,000 strike put has a value of 0.13175 BTC versus the value of 0.09725 of the same option maturing in June. If we plug the data we find on that page in an options calculator we can reprice the option itself. If we try to reprice the 8,000 USD call, inputting 0% as the interest rate (BTC is a non-dividend paying asset) and the correct information about strike, underlying and implied volatility, we get the (almost) exact valuation we have on Deribit:  The numbers below the option price are the "greeks" or the sensitivities of the option price to their various component: DELTA: it's the sensitivity of the option price to the underlying: if the underlying goes up 1 USD, the option price goes up 0.55 USD. GAMMA: it's the second-order sensitivity of the option price to the underlying: if the underlying goes up 1 USD, the option delta goes up 0% (I guess there's a rounding factor here to consider in this calculator) VEGA: it's the sensitivity of the option price to the volatility level: if the volatility goes up 1%, the option price goes up 20.54 USD. THETA: it's the sensitivity of the option price to the time: if 1 day passes, the option price goes down 4.39 USD. RHO: it's the sensitivity of the option price to the interest rates: if interest rates go to 1%, the option price goes up 13.49 USD. The greeks of an option are linked to each other in a pretty complicated way, there are many ways to interpret them and they all varies continuously given the level of the market, the volatility and the time to maturity. Books have been written on how to tame them and use them in your favour. I think this very brief explanation is enough for this thread.
How to price an optionUnderstanding the details of how options are priced, would mean understanding very advanced mathematics, including stochastic calculus, differential calculus, statistics, etc. Here I want only to give you a few important concepts, you have to keep in mind when thinking of options and their value. Black&Scholes won the Nobel prize for their option pricing model. Their biggest achievement was to demonstrate it is possible to price an option using non-arbitrage conditions. Arbitrage is a trade where a profit is gained involving no risk and no capital. Of course, those trades do not exist, so markets will adapt themselves to avoid these situations. Reasoning under the “non-arbitrage” conditions, means also that no risks are involved, hence the individual appetite for risk of each different trader in the market can be taken out of the equation. This means that every trader in the market will reason using the same “language” of a world without risk (if we reason with no-arbitrage conditions, we can ignore the associated risk, then we can ignore the willingness of every trader to take that risk). This means the price of such a derivative is unique, irrespective of the risk appetite for each trader. This has the important consequence the price of an option is INDEPENDENT of the probability given by each trader about the possibility of the underlying ending in-the-money. This is something we have to keep in mind: the price of an option doesn’t mean automatically that the scenario where it ends in-the-money is more “plausible”. Historical Volatility vs Implied Volatility As we can see the only “difficult” input to price an option is the volatility to be used. The correct number to be plugged into the pricer is the expected future realised volatility until the expiration of the option. Quoting this number means quoting the price of the option (being the other option pricing numbers deterministic, i.e. known without uncertainty). The volatility level used to price an option is called implied volatility because it’s the level of volatility “implied” by the quoted price. How do you quote the future volatility? Here’s the trick of options trading. The first idea is to look at the realised volatility: looking at the past can give first guidance of the future volatility. Of course, this is not always true as there can be many factors that can change the volatility in the future. One easy example, specific to bitcoin options could be the halving. This event, according to many models, could have a great impact on the bitcoin price. So we can guess that coming into the halving the volatility will be low: bitcoin might move, but without great variations, but once the halving happens, the price will possibly start swinging more, due to the very different valuation the S2F model implies. In this case realised volatility won’t be good guidance for the future volatility: namely the realised volatility will be much lower than the future volatility used to price options with expiries after the halving. Many websites calculate the realised volatility of bitcoin: on Deribit you can get one. Calculating historical volatility with different horizons yield very different results:  In the above graph, we see the bitcoin price (black line, left axis), with the superimposition of different historical volatility calculations using different terms (yellow, red and blue lines, right axis). Volatility in the short term can be more “volatile” itself (yes, there is the volatility of volatility, but this is for advanced options trading). The yellow line represents the annualised historical volatility calculated using the previous 10 trading days, and as we see in the above graph is swinging more violently, from 180% to below 20%. Volatility calculated over more extended periods of time, like the blue line (calculated over the last 30 days of data) or the red line (calculated over the last 180 days of data) is instead more and more stable as we extend the calculation interval. Of course, we are more interested in matching, with the caveat earlier explained, the historical volatility computation with the time to expiry of the option we want to price. The implied volatility can instead be observed on options markets. If we look at the options screen above we see some IV columns: that is the implied volatility corresponding to each quote. If we use the model in the opposite way, we can use the price as an input and find the volatility implied into that price: that is the implied volatility.
Option strategies - How to use an optionOptions are very complicated instruments, here I want to highlight only a few uses of them. These are the most simple ones, and all have in common to be “static” strategies. This means those are meant to be put in place and not touched until maturity. There are different strategies meant to be adjusted during the life of the option. These are totally different animals and they are called dynamic strategies. Leverage TradingScenario: You want to gain as much possible exposure to bitcoin. You have a very clear trading view. You are not interested in losing your capital if this view doesn’t materialise. Strategy: Use your funding to pay the premium for an out-of-the-money option, choosing the strike to maximise the expected final payout. Example: - Buy 1 call option strike 7,000 USD, Jun Expiry at 0.233 BTC. alternatively - Buy 1 call option strike 8,000 USD, Jun Expiry for a total of 0.1805 BTC.  Analysis: In this scenario, you have gained exposure to the appreciation of bitcoin above the strike level using only a fraction of the capital required to buy the underlying (i.e. 1 bitcoin). In the case of bitcoin being at a price of 10,000 at expiry, in the case of a bitcoin investment, you would have a return equal to (10,000-8,000)/8,000=25%. This is the base case scenario of no leverage. Buying an in-the-money call option the return would be instead (10,000-7,000-1,742)/1,742=72%. Note that if the option gets further in-the-money the return goes up even further as the option paid is constant, while the gain increase linearly. In the second example, we bought an out-of-the-money option, using even less capital. In the case of bitcoin being at a price of 10,000 at expiry, the yield would be in this case (10,000-8,000-1,350)/1,350=48%. Of course in the scenario of an opposite movement, your loss is limited to the premium paid, which would be lost entirely. This implies that you have to choose wisely not only the strike level, to gain the correct level of exposure, but also the expiry, as the movement has to materialise Before the expiry of the option. Covered call writingScenario: You are a whale you want to sell part of your bitcoin holding to finance your daily expenses. You are bullish on bitcoin as an investment. Strategy: Sell out-of-the-money calls, cash in the premium to finance your expenses, actually sell bitcoin only if the price goes up (possibly on a spike). Example: - long 1 bitcoin, - sell 1 option strike 10,000 USD, Jun Expiry at 0.11 bitcoin.  Analysis: The payoff of the structure gives you a benefit over the simple holding of bitcoin equal to the premium if the price is below the strike price at maturity. If at expiry the price is above the strike, the option goes in-the-money and you sell the bitcoin. The strategy has a break-even, compared to being long the BTC only, at a level equal to strike + premium received (in this example at 10,000+0.11*7,478=10,826 roughly). If the BTC goes further up, you basically sold a bitcoin at 10,826, hence the strategy has a lower value against holding the bitcoin. CollarScenario: You are a whale. You want to sell part of your bitcoin holding to finance your daily expenses. You are bullish on bitcoin as an investment. You get pissed off in case of a violent drawdown in bitcoin prices. Strategy: Sell out-of-the-money calls, cash in the premium to finance your expenses, actually sell bitcoin only if the price goes up (possibly on a spike). Use the cashed-in premium to buy protection on the downside, i.e. buying a put option. Buying an out-of-the-money call and selling an out-of-the-money put is a strategy known as "Collar". Example: - long 1 bitcoin, - sell 1 call option, strike 10,000 USD, Jun Expiry at 0.11 BTC, - buy 1 put option, strike 6,000 USD, Jun Expiry for 0.098 BTC.  Analysis: The final payoff is similar to the one of the covered call writing. The payoff of the structure gives you a benefit over the simple holding of bitcoin equal to the difference between the premiums paid to buy the put and the premium cashed in to sell the call. In this particular case, I chose two strike levels to have the smallest positive difference between the twos. If the price is below the strike price at maturity. If at expiry the price is above the strike, the option goes in-the-money and you sell the bitcoin. The strategy has a break-even, compared to being long underlying, at a level equal to strike+premium received (in this example at 10,000+(0.11-0.098)*7478=10,093 roughly). If the BTC goes further up, you basically sold a bitcoin at 10,093. On the contrary, if BTC goes down, you also bought protection at 6,000, as you are long a 6,000 put. More precisely, as you cashed in a premium of 93 dollars, you are protected at a 6,093 USD. In case bitcoin goes down more, you are not affected, as the payoff of the put protects you on the downside.
Word of caution. Options are a very complicated topic. I tried my best effort to explain this topic in the most simple and intuitive way. I can expand the thread in the direction you prefer. Just ask me to explain what you are interested in most, or just ask me to clarify the point you want me to dig more precisely.
If you think this thread or any other of my threads is worth being translated in your own local board, please do! I will be happy to provide assistance!
Useful resources: Online Calculators: Option CalculatorExchanges product information: Option on Bakkt ™ Bitcoin (USD) Monthly FuturesOptions on Bitcoin FuturesOnline courses: Basic: CME Option CourseAdvanced: Options Theory for Professional Trading
This post is eligible for my project: I am a strong believer in the utility of local boards.
I am lucky enough to be able to express myself in at least a couple of languages, but I know this is not the case for everyone.
A lot of users post only on the local boards because of a variety of reasons either language or cultural barriers, lack of interest or whatever other reason.
I personally know a lot of very good users (from the Italian sections mainly, for obvious reason) who doesn't post in the international sections.
I think all those users are missing a lot of good contents posted on the international (English) section or on other boards. If you think you can help here, just visit the thread!
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