Translated Topic in Pidgin Language:- Anythin u wan know about BTC option bt u de fear to ask
Original Topic:- Everything you wanted to know about BTC options but were afraid to ask!
Authur:fillippone
Option 4 bitcoin don de accessible only to whales and som khyn exchanges as Deribiit , bt wen Bakkt nd CME wey b d two main traditional bitcoin exchanges go open d product to dir clients option trading 4 bitcoin go becum widely accessible.
Actually option trading don de available 4 Bakkt since December 9th, while CME go launch product wey de simila leta dis month, and dem go start d trading 4 January 13th.
Options na instruent wey de hard to trade. Dis wan de sure 4 traditional bt e even too de sure 4 wild market like bitcoin.
Wit dis thread i go giv some som khin little theoretical nd practical ways (hints) on how u go tek understand and use options.
I go start de brief wetin option b, explain all d characteristics wey option get and wetin dem mean to investors.
Den i go explain well how we go tek price dem. I no go explain d main mathematical model wey dem use price d optons, becus e go cary us go advance differential calculus wey nobody wan hear. wetin i go use to convey d khin factors wey get impact on option price and we go tek interpreat dem. I go also try clear rod 4 som common misconceptons we de about opton.
4 d end i go explain som common strategies wey de opton trading. E no go too de complicated, na just small eamples on how we go tek use dem 4
mata wey concern investment: weda speculation or hedging.
INDEX
- Introduction
- Wetin b option
- How we go tek price option
- Historical Volatility togeda wit Implied Volatility
- Option strategies - How we go tek use option
- Word wey matta
- Resources wey get use:
Wetin be option
Option na contract wey go give person way dy hold the pawa, bt not d obligation to buy or sell asset, wey dy call the Underlying asset, b4 d time way the contract go expires.
D option wey dy give person way the hold the pawa to buy the asset wey dem keep(underlying) na Im b call Option.
D option wey giv person wey hold the pawa to sell d underlying asset na im b put option.
D price wey dm use do the trading na im b strike price.
wen option generate trade we go talk say it is "exercised", bt if e jst end wey dem no trade anything we talk say e dy "abandoned"
If option fit de exercised only wey e wan end (termination) na dat one b European Option,
While d option way fit dy exercised anytime before e reach time wey e go end(Termination) dat one na im be American Option.
The moni way buyer of option pay seller or person wey b writer of option, na dat one b the premium.
If price for market pas d strike price, d called option dy call "in-the-money", because say for American exercise, e fit exercised with gain.
If not, dem go call d call option "out-of-the-money".
If d price 4 market they below d strike price 4 d put option, d put option go b "in-the-money", because say 4 American exercise
e fit exercised with gain. If not, dem go call d put option "out-of-the-money".
If we look a certain strike, na only call option or put option fit be in-the-money, no be all of dem. Example if we look 10,000 strike option, d call option dy out-of-the-money, but the puts option dy in-the-money.
As e dy expire, if the option fit make d underlying asset weting dem been price am na im be "physical delivery ". Many commodity 4 financial options dy physically settled. Alternatively, option fit control only the moni wey dy d same with d gain exercising the option it self: dat expiry then an in-the-money option go deliver money wey de the same with the difference way they for asset price and strike (4 call option case ) or the difference wey de for strike price and the asset (for put option case). For dis mata, them they call d option na cash-settled.
4 d case of Bitcoin option wey b Bakkt option on BTC futures, the option de physically settled: wen d expiry of d option in-the-money option generate a better position in d underlying future. e get only a trick: as e de common for plenty commodity options, d option Im self expires few days before d future, so d holder of d in-the-money options get possibility to close d future position b4 d main delivery of d underlying of future (the option get future as underlying, d future get Bitcoin as underlying). Na y you fit hear some marketing nonsense wey "Bakkt options go allow u chose d type delivery :" monei or face to face".
B4 we analys am mathematically how 2 price option, make we see the impact 4 pricing wit d intuition.
STRIKE: D first element na strike. E Sure, d different wey de between market price and strike na d first hint at d value for option. Intuitively d more d option dy in-the-money, d more dat option go get value.
STRIKE: D first element na strike. E Sure, d different wey de between market price and strike na d first hint at d value for option. Intuitively d more d option de in-the-money, d more dat option go get value.
Wen option de in-the-money, dat option get a calculated value(intrinsic). 4 call and put options, the calculated value dy d same wit d different bitwn d underlying price and the strike price: intrinsic value de only measure d gain wey determined by d diffence bitwn d option's strike and d markets price.
Wen option de out-of-the-money instead, d calculated value na zero.
D intrinsic value na d minimum value of d option: if d value of d option go de below d intrinsic value, e fit be arbitrage, buying that option and changing it to gain. So wen BTC de trade for 7,000, a call wit strike K = 5,000 is in-the-money and get intrinsic value of 2,000, so d price go de biger dan dat. Na so a call wit a strike K= 10,000 get no intrinsic value I.e the value na zero. E sure, intrinsic value na only a part of price an option: oda variables de impact d pricing of option, any one of dem de add value to d intrinsic value to get d final value 4 the option:
TIME TO EXPIRY:D second element wey de important to price option na d time wey e go take expire: d longer e go take to expire, d costly d option. If we price two option wit d same characteristics, wit different date to expiry, d one way get long expiry date go get biger money.
VOLATILITY: As d volatility of d underlying asset big, naso d value of d option go big too. 4 here d explanation go de tricky small. Make we talk say d main reason no be how big d volatility of 4 underlying be, na how big d volatility fit dy be wey dy go inside d money. We go see later why dis wan dey important, just put am for mind say e no go too show. The option wey de buy no dey get anything 4rm d option wey dey go inside d money. Rather no give gain, if na only option de go inside d money. The person wey buy d option go enjoy because say d underlying asset don move (i.e he go de change) for risk wey de come neutrally, i.e make you no take d risk of gaining because the option dy enter inside d money.
Make we see one example:
If we buy call option wey be BTCUSD, wey get strike price of 8,000 USD, wey de expire for June 2020.
Dis strategy name na Long call because to buy something na him dem dey call being “long” for finance jargon.
D premium 4 dis option own na 1,350 USD, we go pay immediately (“upfront”, again for finance region).
Mek we go forward sharpaly to option wey dey expire.
The outcome for our option go follow d final price wey bitcoin be:
If BTCUSD de unda 8,000 USD d option go dey abandoned, e don expire without use be dat.
If BTCUSD de above 8,000 USD d option go still de, and e go generate payoff wey de d same wit d difference (positive) wey de between BTCUSD and d strike price.
4 more formal terms d call option payoff go be dis tins:
Call=max(0;Spot-Strike)
D last payoff 4 d strategy go be dis tings:
know say d dis graph reason say we pay a premium of 1,350 USD before time, we must pay d premium 4 all scenarios: if d option expires witout, d P&L (profit and loss) 4 d strategy de negative and d same to d premium wey we pay, if not e go de eqaul to d option payoff netted with premium paid.
know say d gain and loss go start to de increase for strike price level, 8,000USD for dis case, but e go break even if na for high level wey de dsame wit d strike + d premium u pay, or 9,350USD fir dis example.
Mek we see d same tin for put option.
We buy put option for BTCUSD 4 6,000 USD strike price, wey de expire June 2020.
Dat strategy na long put.
D premium 4 d option na 732 USD, we suppose pay am keep "upfront".
Mek we go forward sharpaly to option wey dey expire.
D result 4 d option de change according to d Bitcoin price:
If BTCUSD pass 6,000 USD d option go de abandoned, e go expire without any value.
If BTCUSD de below 6,000 USD d option go de exercised and go provide a payoff d same wit to positive difference wey de between d price of BTCUSD and strike price.
4 more formal terms d put option payoff go b dis tins:
Put=max(0;Strike-Spot)
D final payoff 4 d strategy go b the dis tins:
D graph look familiar, as e be d symmetrical payoff pas d call.
Mek we know say dis graph dy reason am say make we pay premium of 732 USD keep, to pay d premium na must for all case: wen option expire witout value, d gain and loss of d strategy de d same and negative to d premium way we pay, if not e go de equal to payoff option wey we put for d premium way we pay.
Know say d gain and d loss go start to rise for strike price level 6,000 USD 4 dis one, but e go breaks even 4 lower level wey de d same with d strike - d premium wey we pay or 5,267 USD for dis example.
Make we take eye see option exchange to look 4 confirmations.
All d examples na from Deribit, who be d only big source wey de available for option prices: to create account de easy and e no de need KYC. If you like am do am for educational reason. E sure say some issues de, and I no 4 any way de linked wit d exhange.
If we cary BTC options, and Jun 26 2020 we go see a screen wey look like dis tins:
(click on the image to enlarge it)
Dis particular page de reason d options wey go mature 4 26 Jun 2020.
D middle grey colum de represents d strike level. D options wey de d same row get d same strike price.
4 d of column left side, we get d call option for each strike, and d right-hand side carry d puts option.
D bid price na d price wey oda participants wan buy d option, i.e. Price wey u suppose sell am if u wan sell.
D ask price na d price wey oda participants wan sell d option, I.e. d price way u go pay if u wan buy am.
Each bid and ask price get a corresponding Implied Volatility level, wey b d volatility level dat, if we put dem 4 d model, e go give us back the aforementioned price.
Na y if u dy talk about option, volatility and price na d tins wey be d exchangeable concepts.
As we don see pass, we se say d calls get price wey dy drop wen strike dy go up: 6,000 call get mid-price (d average wey de between d bid and Ask) for 0.20725 BTC, while 10,000 call get a mid-price of 0.11275 BTC.
D opposite na im sure for put. D puts wey get lower strike get lower premiums.
D put stuck for 10,000 get price of 0.46075 BTC, and d 6,000 put get mid-price of 0.09725 BTC.
Again, we see say if we check d options wey get plenty time b4 dem expire, each of dem get bigger value: d 10,000 USD strike call wey go muture 4 September get value of 0.16775 BTC versus d value of 0.11275 BTC 4 d same option wey de mature June. D 6,000 strike put get a value of 0.09725 for d same option we de mature June
If we put data wey we find 4 dat page in option calculator, we fit price d option itself again.
If we try reprice d 8,000 USD call, putting 0% for interest rate (BTC na paying asset wey dem no fit divide) d correct info about strike, underlying and implied volatility, we go get almost d same valuation we get for Deribit:
D plenty numba under d option price na d "greeks" or d toughness of d price of d option to d oda components:
DELTA: na d sensitivity of d option price to d underlying: If d underlying go up wit 1 USD, option price self go go up with 0.55 USD.
GAMMA: na d second-order sensitivity 4 price option to d underlying: if d underlying go up with 1 USD, d option delta go up 0% (I de reason say some rounding factors wey we suppose consider de dis calculator)
The numbers below the option price are the "greeks" or the sensitivities of the option price to their various component:
VEGA: na d sensitivity for option price to d volatility level: if d volatility go up 1%, d option price go go up 20.54 USD.
THETA: na d sensitivity of option price to d time: if 1 day pass, d option price go drop down by 4.39 USD.
RHO: na d sensitivity for option price to d interest rate: if d interest rate move go 1%, d option price go move go 13.49 USD.
D greeks for option de link to each oda for one hard way, ways chok wey we fit interpret dm and de go de change as d level of market de change, d volatility and d time 4 maturity.
Dem don write books wey de show how to change and Dem d wey e go good 4 u. I sure say dis small explanation don de OK for dis thread.
How u go tek price option
To understand d details of how options price dey b, e go mean say u go understand advanced mathematics, even stochastic calculus, differential calculus, statistics etc.
For here I go give u small important concepts, u go keep am for mind if you dey think of options and wetin their value b.
Black&Scholes na dem win d price for their option pricing model. Their achievement wey big pass na to demonstrate if e dey possible to price option wey dey use non-arbitrage conditions. Arbitrage na trade wey profit wey de gain de involve no risk and e no get capital. Naso he dey be, dos trades no dey exist, dem markets go follow adapt to avoid these situations. Reasoning wey de under d “non-arbitrage” conditions, mean say risk no de inside, hence d individual appetite wey de risk 4 each different trader for d market fit de comot for d equation. E mean say every trader for d market go reason using d same “language” of world wey no get risk (if we reason with no-arbitrage conditions, we fit ignore d associate risk, den we fit ignore wetin wan make every trader carry dat risk). E mean say d risk of dis kind derivative dey unique, irrespective for d risk appetite for each trader.
Dis wan get d important consequence wey d price for option dey INDEPENDENT of d probability wey de give each trader about d possibility for d underlying ending wey de inside d monei. Dis wan na something wey we go put for mind: D price wey option get no mean say automatically say d scenario where e end inside d money dey more “plausible”.
Historical Volatility togeda wit Implied Volatility
As we don se say d only "difficult" to option price na d volatility wey we go use.
D correct numba wey go fit in d pricer na d expected future realised volatility until d option go expire.
Quoting dis numba mean say quoting d price of option (being d oda option pricing numba deterministic, i.e. dem no am witout uncertainty).
D level of volatility wey dem use to price option na im be implied Volatility because say na d level of volatility "implied" by quoted price.
How u go tek quote d future volatility?
Here na d trick 4 option trading.
D first idea na to look d realised volatility: if u look d past, u go get d first guidance to d future volatility. E sure, e no de always b true as many factors fit change d volatility 4 future. One easy example, we de specific to Bitcoin option fit b halving. Dis even fit get better impact to Bitcoin price according to many people model. So we fit guess say if halving de come d volatility go low: Bitcoin fit move, without big variations, bt once d halving sup, d price fit begin de move wela, due to d different valuation d S2F model implies. For dis case d realised volatility no go b good guidance for d future volatility:
D realised volatility go d lower dan d future volatility used to price options wit d expires after d halving.
Plenty websites don calculate d realised volatility 4 Bitcoin: on Deribit u fit get one.
Calculating historical volatility wit different horizons go giv very different results:
For d graph wey dy up, we go see Bitcoin price (black line, left axis), with superimposition for different volatility calculations as dem use different terms (yellow, red and blue lines, right axis). Volatility 4 short term fit de more"volatile" imself (yes, volatility of volatility de, bt na for advance options trading). D line wey b yellow de represents d annualised historical volatility wey dem don calculate using d b4 10 trading days, and we see say d graph de swing more volatility, wey from 180% drop down 20%. Volatility wey dm calculate for mor extended time, lik d blue line (calculated 4 lik 30days of data) or d red line (calculated 4 d last 180 days of data) is instead mor nd mor stable as d interval for d calculations.
4 sure, we de mor interested 4 matching, wit d caveat wey we explain b4, d historical volatility computation wit time wey d option wan expire we wan to price.
D implied volatility fit b instead observed 4 option markets. If we see d option screen 4 up we go see some IV columns: dat is d implied volatility wey correspond to to each quote. If we use d model for opposite way, we fit use d price as input and find d volatility implied into d price: wey b d implied volatility.
Option strategies - How we go tek use option
Options ar instruments wey de very complex, here I wan show some small use of dem.
Dis one na d easy ones, and all of dem de common to b "static" strategies. Dis means say we go put dos once in place, and we no go touch dem till dem mature. Different strategies de wey we fit adjust during d life of d option. Dis ones na totally different animals and dem de call dm dynamic strategies.
Leverage Trading
Scenario:
U wan gain as much as possible exposure to Bitcoin.
u get clear treading view.
U no wan lose ur capital if dis no materialise.
Strategy:
Use ur own moni to pay d premium 4 option wey de out of d moni, choosing d strike to maximize d final expected payout.
Example:
- Buy 1 call option strike 7,000 USD, e go expire 4 Jun at 0.233 BTC.
alternatively
- Buy 1 call option strike 8,000 USD, e go expire 4 jun 4 a total of 0.1805 BTC.
Analysis:
4 dis scenario u don get eposure wey u go take appreciate if bitcoin don pass strike price level usin a pat of capital wey de require to buy unerlying (i.e 1 bitcoin).
4 d case wey bitcoin de 10,000 as e wan expire, 4 d case a bitcoin investment, u go get return wey d same to (10,000-8,000)/8,000=25%.
Dis one na base case scenario 4 no leverage.
if we buy in-the-money call option d return go b instead (10,000-7,000-1,742)/1,742=72%.
mek we no se if d option go further in d moni d retun go go up futher too as d option pay na constant,while de gain go increase linearly.
4 d second eample, we buy option wey de out of d moni wit less capital.
4 d case wey bitcoin de 10,000 as e wan expire, d yield go b in dis case (10,000-8,000-1,350)/1,350=48%.
4 sure dis scenario wey b oposite movement, ur loss de limited to d premium paid, wey go be completly loss.
Of course in the scenario of an opposite movement, your loss is limited to the premium paid, which would be lost entirely.
Dis sow se u go chose wisely no b only d strike level, to get beta level of exposure, bt also d expiry, as movement don materialise b4 d option go expire.
Covered call writing
Scenario:
U b whale u wan sell som pat of bitcoin wey u hold to use 4 ur daily needs. U de bullish on bitcoin as investment.
Strategy:
Sell out-of-d-moni calls, mek cash in d premium to finance ur epenses, me u actually sell bitcoin only as d pice go ip (possibly 4 a spike).
Example:
- long 1 bitcoin,
- sell 1 option strike 10,000 USD, Jun Expiry at 0.11 bitcoin.
Analysis:
The payoff of d structure go giv u benefit pass d simple holding of bitcoin wey de d same to premium if d price go down d strie price at maturity.
If at expiry d price pass d strike, d option de go in-d-moni and u sell d bitcoin.
D strategy get a break-even, pass to being long d BTC only, at a level wey de d same to strike + premium received (in this example at 10,000+0.11*7,478=10,826 roughly).
If d BTC muv further up, u cum basically sell a bitcoin at 10,826, hence d strategy get a lower vale against holding d bitcoin.
Collar
Scenario:
U b whale
U wan sell som pat of bitcoin wey u hold to use 4 ur daily needs.
U de bullish on bitcoin as investment.
U de pissed off in case of violent drawdown 4 bitcoin prices.
Strategy:
Sell out-of-d-moni calls, mek cash in d premium to finance ur epenses, me u actually sell bitcoin only as d pice go ip (possibly 4 a spike).
Use cashed-in premium to buy protection 4 d downside, i.e mek u buy put option.
To de buy out-of-the-money call and de sell out-of-the-money put na strategy we dem de call "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 playoff de similar wit d one wey dey covered call writing.
The payoff 4 d structure go give you benefit on top d simple holding of bitcoin wey equal to d difference inside d premium wey dem pay to buy d out and d premium wey de cashed in to use sell d call. For this kayn case, i chose 2 strike level to get d smallest positive difference wey dey between the twos. If d price de below d strike price for maturity. If for expiry d price de above d strike, d option go de inside the money and you fit sell your bitcoin.
D strategy get break-even, if he dy compared to being long underlying, for level wey dey equal to strike+premium wey dy received (for dis example wey be 10,000+(0.11-0.098)*7478=10,093 roughly).
If BTC go up pass before, you don basically sell bitcoin for 10,093.
4 d contrary say BTC go down, u also buy protection at 6,000, as you don long 6,000 put. More precisely, d way you take cash out 4 premium wey b 93 dollars, you de protected for USD wey be 6,093 USD. 4 case wey bitcoin go down pass before, you no go dey affected, as d payoff of d put go protect u 4 d downside.
Word wey matter.
Option topics get as e dey b.
I try my best say I de explain dis topic for d simplest way and d way wey de go grab.
I fit expand d thread d way u go take sabi am. Just tell me wetin u dey interested pass 4 d topic, or make u ask me make I clarify you more 4 d point wey you wan know more about.
If u tink say dis thread or any oda of my threads de wey dem suppose translate go ur own local board, please mak u provide help!
Resources we get use:
Online Calculators:
Option Calculator
Exchanges product information:
Option on Bakkt ™ Bitcoin (USD) Monthly Futures
Options 4 Bitcoin Futures
Online courses:
Basic: CME Option Course
Advanced: Theory 4 professional options trading
Dis post de eligible 4 my project:
Quote
Me na strong believer 4 local boards mata.
I de lucky enough as i don epress myself 4 at least some languages, bt i know say dis one no be d case 4 everone.
Plenty users de wey b say na oly local board dem de post because of som reasons wey fit be language or culture barriers, and some na lack of interest or some oda reasons
Me personally know plenty users wey good (4 d italian section mainly 4 som reasons) whu no de post 4 international sections.
I think say all dos users de miss plenty good content wey dem post 4 international (English) section or oda boards.
I de lucky enough as i don epress myself 4 at least some languages, bt i know say dis one no be d case 4 everone.
Plenty users de wey b say na oly local board dem de post because of som reasons wey fit be language or culture barriers, and some na lack of interest or some oda reasons
Me personally know plenty users wey good (4 d italian section mainly 4 som reasons) whu no de post 4 international sections.
I think say all dos users de miss plenty good content wey dem post 4 international (English) section or oda boards.
If u tink say u fit help here, just come see our thread!
