Topic: Using MPOE - A beginner's guide. (Read 7193 times)

See here.

is http://mpex.co/ down atm ?

was trying to check out the site just now

coinbr down also maybe its just a weekend maintenance thingy

For one, the fee has been bumped to 30 ever since GLBSE imploded. For the other, there are brokers (such as for instance in my post above) that can help you. Ask in #bitcoin-assets on freenode.

I am very interested to learn puts and options but to even sign up for MPOE its 20 BTC.  For some of us that is not an option when we are just trying to figure out the website.  I have read some of the guides you have written, but I am the type, I have to actually see what is going on to understand it.  I don't think the "community" is as uninterested as you think, you just understand it.

Try coinbr.com.

fain dar totuși ceva cu UI ar fi mai ușor 

Not really, the "community" seems utterly uninterested in learning anything of any practical use (as this thread is sad testimony) unless to make a quick & incompetent (and of course uncredited) repackagement into some hair-brained scheme a la usagi's nonfunctional cdos.


Yea, the figure is pretty accurate.

Was there ever a post on selling PUTs?




To sell a PUT option you need to deposit an amount greater than 1 bitcoin for each contract as surety.  For example, to create a O.BTCUSD.P200T option for sale might be in the range of requiring a ~1.8 BTC deposit whereas the deposit to create a O.BTCUSD.P100T option for sale might be less than 1.1 BTC.

So someone put up some fairly serious coin (maybe ~30K BTC) as surety to be able to sell those PUT options.

Quotes are based on 24 hour average price as reported by bitcoincharts.com. This is the case for buys, sells, executions etc. You can see the current price on the top left of the page.

When the market exchange rate just moved about twenty cents I didn't see the price for the options move hardly anywhere nearly as much.  Are the quotes computed in real-time or are they instead based on a weighted average or something?

In comment #4 we've looked at long CALLs and PUTs, now let's look into selling CALLs short.

MPOE allows fully covered short positions. This means that you will be quoted a reserve, receive payment for your contracts and then on expiration or exercise of the contracts also receive the remainder of your reserve, after any legitimate claim of the contract buyer was satisfied. The reserve is always 1 bitcoin per contract in case of shorting CALLs and the strike price divided by BTC/USD rate per contract in case of shorting puts.

In order to sell short either CALLs or PUTs make sure you follow the "sell to open" (2nd part) of the sell page. Selling to close [your position] is when you already hold the contracts and want to sell them and close out. Selling to open [a position] is when you hold no contracts and wish to sell short.

Short CALLs. Short means you sell the contracts, and thus are held to make good on exercise at any moment up until the point of expiration.

Let us consider the case of at the money CALLs (struct at 5.0) :


Upon receipt you will be sent (the BID of 0.10168310 * 1000 contracts / 4.68 BTC price) = 21.72715811 BTC as the payment for the contracts you have sold. If during their lifetime the CALLs are never exercised, upon expiration you receive your original 1000.91101000 BTC, thus making a 21.72715811 BTC profit.

Let us take some examples of the contract being exercised:

I.1. If the price goes to 5.5 and the buyer exercises he is owed (5.5 - 5.0) / 5.5 * 1000 = 90.90909090 bitcoins. You will thus receive 910.001919091 BTC from your original 1000.91101000 BTC reserve, thus making a loss of about 70 BTC.

I.2. If the price goes to 7.5 and the buyer exercises he is owed (7.5 - 5.0) / 7.5 * 1000 = 333.33333333 bitcoins. You will thus receive 667.57767666 BTC from your original 1000.91101000 BTC reserve, thus making a loss of about 300 BTC.

If instead you were to sell short CALLs struck at 1.0,


As you can see, the reserve is the same for CALLs sold short no matter the strike price.

Upon receipt you will be sent (the BID of 3.42302651 * 1000 contracts / 4.68 BTC price) = 731.415920940 BTC as the payment for the contracts you have sold. If during their lifetime the CALLs are never exercised, upon expiration you receive your original 1000.91021000 BTC, thus making a 731.415920940 BTC (over 70% on your original reserve). Note however that this situation is extremely unlikely, seeing how the price of the BTC in USD will have to pretty much drop to ~1.0.

Let us take some examples of the contract being exercised:

II.1. If the price goes to 9.0 and the buyer exercises he is owed (9.0 - 1.0) / 9.0 * 1000 = 888.88888888 bitcoins. You will thus receive 112.02132111 BTC from your original 1000.91021000 BTC reserve, thus making a loss of about 150 BTC.

II.2. If the price goes to 7.0 and the buyer exercises he is owed (7.0 - 1.0) / 7.0 * 1000 = 857.14285714 bitcoins. You will thus receive 143.76735285 BTC from your original 1000.91021000 BTC reserve, thus making a loss of about 120 BTC.

II.3. If the price goes to 5.0 and the buyer exercises he is owed (5.0 - 1.0) / 5.0 * 1000 = 800.00000000 bitcoins. You will thus receive 200.00000000 BTC from your original 1000.91021000 BTC reserve, thus making a loss of about 70 BTC.

II.4. If the price goes to 3.0 and the buyer exercises he is owed (3.0 - 1.0) / 3.0 * 1000 = 666.66666666 bitcoins. You will thus receive 334.24354333 BTC from your original 1000.91021000 BTC reserve, thus making a gain of about 65 BTC.

II.5 If the price goes to 2.0 and the buyer exercises he is owed (2.0 - 1.0) / 2.0 * 1000 = 500.00000000 bitcoins. You will thus receive 500.00000000 from your original 1000.91021000 BTC reserve, thus making a gain of about 230 BTC.

As you can see, the lower the strike chosen the higher the sensitivity to price movements (in either direction). The higher the strike chosen, the lower the sensitivity to price movements, and the higher the impact of crossing the strike price.

In conclusion: Selling deep in the money CALLs short allows you to benefit from drops in the BTC/USD price. Selling at the money or out of the money CALLs short allows you to benefit from drops in volatility as time passes. In either case you can at most lose the entirety of your reserve (and this only if the BTC/USD actually reaches infinity), unlike fiat denominated option contracts where you could literally lose an infinite amount of money as the price goes up.

Let us say you make 36`000 a year and have decided to put 10% of your monthly salary for the next three months in bitcoins, as an investment for the future.

This means that at the end of March, April and May you will want to spend 300 USD to buy bitcoins. At the current price this means 300 / 4.71 = 63.69426751 BTC each month, or 191.08280254 BTC in total. What happens if early April BTC/USD climbs to 9.5 ? Well, in that case you will only get ~127 BTC total, about 2/3 of what you had hoped originally.

What can you do ?

Step 1 (investing): Buy bitcoins. 63.69426751 BTC x 4.71 = 300 USD
Step 2 (hedging): Buy 63 CALL @5.0 contracts expiring April at $1.14137835 each, they cost 15.26288210 BTC.
Also buy 63 CALL @5.0 contracts expiring May at $1.78153588 each, they cost 23.82604310 BTC.

Your position now consists of 24.60534231 BTC + 63 CALL @5.0 April contracts + 63 CALL @5.0 May contracts.

Fast forward to your April paycheck:

If BTC/USD is 11.0, you buy 33.33333333 BTC and cash 34.36363633 BTC from your April options ( (11 - 5) / 11 * 63 )
 thus your position is now 92.302311970 BTC (= 1`015.32 USD) + 63 CALL @5.0 May contracts.

If BTC/USD is 9.0, you buy 27.27272727 BTC and cash 28 BTC from your April options ( (9 - 5) / 9 * 63 )
 thus your position is now 79.878069580 BTC (= 718.90 USD) + 63 CALL @5.0 May contracts.

If BTC/USD is 7.0, you buy 42.85714285 BTC and cash 18 BTC from your April options ( (7 - 5) / 7 * 63 )
 thus your position is now 85.46248516 BTC (= 598.23 USD) + 63 CALL @5.0 May contracts.

If BTC/USD is 5.0, you buy 60 BTC, thus your position is now 84.60534231 BTC + 63 CALL @5.0 May contracts.

Fast forward to your May paycheck:

If BTC/USD is 15.0 (11.0 prev) you buy 20 BTC and cash 42 BTC from your May options ( (15 - 5) / 15 * 63 )
  thus your position is now 154.30231197 BTC (= 2`314.53 USD).

If BTC/USD is 10.0 (9.0 prev) you buy 30 BTC and cash 31.5 BTC from your May options ( (10 - 5) / 10 * 63 )
  thus your position is now 141.37806958 BTC (= 1`413.78 USD).

If BTC/USD is 5.0 (5.0 prev) you buy 60 BTC
  thus your position is now 144.605342318 BTC (= 723.02 USD).

As you can see this strategy ensures you have about the same amount of BTC in your account by the end of May no matter where the BTC/USD price goes. If it were to go to infinity (literally) you would have 24.60534231 + 63 + 63 = 150.60534231 BTC in the end with the downside that if the BTC performs poorly (stays at 5.0) you end up with a position worth in total 732 USD, which is less than the 900 you actually put in (18.67% less, actually). So basically for a < 20% fee you can be sure that come Hell or high water, you will have by the end of May at least 140 bitcoins.

Let's say you have 142 dollars to invest in bitcoins until the end of April but want to make sure no matter what happens or how the price goes you never lose more than 37 (so are always left with at least 105 dollars at the end of next month).

Step 1 (investing): Buy bitcoins. 30 BTC x 4.73 = 141.90 USD
Step 2 (hedging): Buy 30 PUT @4.5 contracts expiring next month at $1.14235925 each, they cost 7.24541509 BTC

Your position now consists of 22.754584910 BTC + 30 PUT @4.5.

If BTC/USD goes to 5.0 (*), your position is worth 22.754584910 * 5 = 113.77 USD, > 105.
If BTC/USD goes to 4.0, your position is worth 22.754584910 * 4 (= 91.01) + .5 * 30 (= 15) = 106.01 USD, > 105.
If BTC/USD goes to 3.0, your position is worth 22.754584910 * 3 (= 68.26) + 1.5 * 30 (= 45) = 113.26 USD, > 105.
If BTC/USD goes to 2.0, your position is worth 22.754584910 * 2 (= 45.5) + 2.5 * 30 (= 75) = 120.5 USD, > 105.
If BTC/USD goes to 1.0, your position is worth 22.754584910 * 1 (= 22.75) + 3.5 * 30 (= 105) = 127.75 USD, > 105.

The worst case scenario is for BTC/USD = 4.0, when you barely make 1 dollar over your target. The further price diverges from 4.0, the more money you have to show for it.

You can obviously fine tune the strike to match your actual expectations of price evolution. Let us try the same scenario with a lower strike price:

Step 1 (investing): Buy bitcoins. 30 BTC x 4.73 = 141.90 USD
Step 2 (hedging): Buy 30 PUT @3.5 contracts expiring next month at $0.57007228 each, they cost 3.62560507 BTC

Your position now consists of 26.37439493 BTC + 30 PUT @3.5.

BTC/USD = 5.0 (*), position worth 26.37439493 * 5 = 131.87 USD, > 90.
BTC/USD = 4.0, position worth 26.37439493 * 4 = 105.49 > 90.
BTC/USD = 3.0, position worth 26.37439493 * 3 (= 79.12) + .5 * 30 (= 15) = 94 USD, > 90.
BTC/USD = 2.0, position worth 26.37439493 * 2 (= 52.74) + 1.5 * 30 (= 45) = 97.74 USD, > 90.
BTC/USD = 1.0, position worth 26.37439493 * 1 (= 26.37) + 2.5 * 30 (= 75) = 101.37 USD, > 90.

As you can see, in exchange for a higher possible loss tolerance (minimum of 90 USD instead of 105) you capture more of the possible gain (131.87 USD if BTC/USD goes to 5.0 instead of 113.77 USD in the previous example). The person holding no puts would have obviously had 150 USD with BTC/USD = 5.0, so the cost of insuring your position to 105 can be said to have been 24.15% whereas the cost of insuring your position to 90 can be said to have been 12.08%.

In general speaking, the higher the strike you pick the higher the minimum guaranteed value of your position, at the cost of a lower capture of value from price upswings. The lower the strike you pick the lower the minimum guaranteed value of your position, but also at the benefit of a higher capture of value from price upswings.

Options are but a tool in the arsenal of the savvy investor. It is up to you to use them correctly for the most benefit.

------
* Obviously if BTC/USD goes to 6.0 or beyond your position will be worth more than the 113.77, never less.

Since MPOE allows you to go short and there are two contract types you can buy or sell (CALL and PUT) there's four different strategies you could be using. Assuming BTC/USD = 4.78 let's do some case studies to better understand how options can help and what the possible pitfalls are.

I. Long CALLs. Long means you buy the contracts, and thus hold the option to exercise at any moment.


I.1. If the price goes to 5.5 you are entitled to the difference between the price and the strike (so, 5.5 - 5.0) in BTC (so 0.5 * 100 / 5.5 = 9.09090909 BTC. Because you have paid 10.38589110 it comes down to a net loss of 1.29498201 BTC.

I.2. If the price goes to 7.5 you are entitled to the difference between the price and the strike (so, 7.5 - 5.0) in BTC (so 2.5 * 100 / 7.5 = 33.33333333 BTC. Because you have paid 10.38589110 it comes down to a net gain of 22.94744223 BTC.

If you figure in USD, your original investment of 49.64 USD (10.38589110 * 4.78) turned into 250 USD (33.3333333 * 7.5), and thus you've transformed a 50% increase in the price of the underlying into a 500% increase in your dollar position (or 300% if you account in BTC, because the BTC itself increased by 50%). So in this case long CALL contracts allow you access to a 10x leverage factor.

I.3. If the price fails to reach 5.0 during the life of the contract (all contracts expire on the last Friday of their respective months) you are entitled to nothing, and so make a 10.3858911 BTC loss, which is limited to at most 51.92 USD (because we know how much you paid and we know the price can never be over 5.0). Of course in most cases option contracts have a theta and gamma value on top of their delta (*), so in general you will never have to settle for the simple strike-price formula except in the cases where you actually wait out for the expiration.


II. Long PUTs. Long means you buy the contracts, and thus hold the option to exercise at any moment.


II.1. If the price goes to 4.5 you are entitled to the difference between the strike and the price (so, 5.0 - 4.5) in BTC (so 0.5 * 100 / 4.5 = 11.11111111 BTC. Because you have paid 15.96144410 it comes down to a net loss of 4.85033299 BTC.

II.2. If the price goes to 2.5 you are entitled to the difference between the strike and the price (so, 5.0 - 2.5) in BTC (so 2.5 * 100 / 2.5 = 100 BTC. Because you have paid 15.96144410 it comes down to a net gain of 84.0385559 BTC.

While it is true that the value of these 84 BTC is only ~210 USD, so you've only made a 300% gain in terms of USD from your original 79.80 investment, still you've managed to increase your BTC position over five fold. Thus buying puts is a very efficient strategy if you are trying to exploit a price drop to increase your BTC position at low cost.

II.3. If the price fails to go under 5.0 during the life of the contract (all contracts expire on the last Friday of their respective months) you are entitled to nothing, and so make a 15.96144410 BTC loss. Of course in most cases option contracts have a theta and gamma value on top of their delta (*), so in general you will never have to settle for the simple strike-price formula except in the cases where you actually wait out for the expiration.

All these calculations presume that you are dealing directly with MPOE as a Market Maker. However, you now have the option to go in the mid market yourself by putting in your own orders up which other users might accept, thus giving you a better price.


CONCLUSIONS : Buying long CALLs allows you to benefit greatly from price upturns, based on the practical equivalent of 10x leverage but without most of the corresponding risk. Buying long PUTs allows you to benefit greatly from price downturns, allowing you to significantly increase your BTC holdings on the cheap. Both these strategies have fixed possible downside.

We will continue with looking at short position in the next installment of our little guide

---------
* "The greeks" are parameters that quantify risk. Delta reflects the part of the value of an option contract that is due to the value of the underlying, so a CALL at 3.0 when the value is 5.0 will never be worth less than 2.0 because that's the delta value. Gamma reflects the part of the value of an option contract that is due to the volatility of the underlying (ie, how often, how fast and how deep the value varies). Theta reflects the part of the value of an option contract that's due to the time left to expiry (so contracts that have six weeks left are more valuable than contracts that have two weeks left).

Thanks for the detailed tutorial!

A number of people have complained about this, so I've compiled this guide to cover the basics. Feel free to ask any questions here or if you prefer directly on #bitcoin-otc.

Step 0. You want to visit the page and read the text there. Also, if you don't really know much about options you want to start by reading up on them, since this guide and MPOE in general assumes you understand what they are and how they work.

Step 1a. Opening a long position. This means you obtain some option contracts, either Calls or Puts, which you can later either sell back or exercise.

To open a long position, click on either CALL ASK or PUT ASK quotes for the month that interests you. For instance, to obtain CALL @ 1.0 contracts expiring this month (March 30th) you click on the first row 2nd column. You will be prompted to type in the number of contracts you would want to buy (each contract stands for 1 BTC) and then be given a quote, something like:


Next, you send an email which must contain the quoted sum (50.00000102BTC) and your bitcoin address. That bitcoin address is where you will be receiving your change and any benefits from the option (if you sell it later, for instance). Most people just copy/paste the first two lines into the email along with their btc addy.

The Sell side depth tells you how your order will be executed. In this case you are dealing directly with MPOE itself. If there were other bids (from users) you'd first buy from them. MPOE only steps in when there are no other bids, to make sure that you can always buy and sell as needed (so the market stays liquid - MPOE is a Market Maker in financial terms).

After sending the email you send along the amount of bitcoins quoted. Make sure you don't end up rounding the figure, those last three digits are very important and without them your order is meaningless (and could end up forfeit). Once your transaction is received and processed you will receive a little change, resulting mostly from the rounding (when quoting your total MPOE rounds up the last three digits and then tacks on a code, which means that almost always you're owed back a few satoshi) but also due to any price movement.

That's it, you now own some Calls or Puts!

Step 1b. Opening a short position. This means you sell some option contracts, either Calls or Puts, which the buyer can then at any point exercise. Thus you are effectively writing options yourself.

In order to do this click on either CALL BID or CALL PUT quotes for the month that interests you. Mind that MPOE only allows covered selling.


Just as in case 1a above, you send an email, then the amount. If you do not specify a quote in your email your sale will be executed by MPOE at the shown bid price. You will receive the result of your sale, so in this case if the BTC/USD price is 4.65 and the quote for [email protected] expiring this month was 0.00002672 you receive 0.000637832BTC (0.00002672 each * 111 contracts / 4.65 btc/usd price). If you do specify a quote in your email you will be listed as such, and executed when someone buys into you.

Step 2a. Closing a long position. This means you're selling out some contracts you already have bought, hopefully at a profit.

In order to close your long position you click on either CALL BID or CALL PUT quotes for the month that interests you.


First you send an email stating that, then you send the BTC amount. If you have no contracts MPOE will just keep your 0.9xxx BTC. If you have at least one contract, even if less than the number stated, they will be sold at the current quote, the total will have your 0.9xxx BTC added to it and the result will be sent over to your bitcoin address (the one you specified when entering the position). The most contracts you can sell at one time are 9999, resulting in something like 0.94029999BTC. If you just want to sell all your PUT @1.0 contracts you can also send a 0.9402BTC transaction (all zeros).

Step 2b. Closing a short position. This means you're buying back, hopefully at a profit, some contracts you earlier sold.

Closing a short position is no different for you than opening a long position, so see Step 1.a above.

Once the order to close out your short position is processed, you will receive your collateral plus your benefits, plus the clerical amounts. Let us look closer at an example to understand this better:

Today, John. R. Bitcoiner decides he wants to short sell some calls. He goes through step 1.a and sends 100.91100100BTC for 100 Call contracts @5.0 expiring this month. At the time of his sale the quote is 0.48484235 and BTC/USD = 4.65. He thus gets back 100 * 0.48484235 / 4.65 = 10.426717204BTC.

Now, suppose that John R. Bitcoiner keeps these options until expiry and they are never exercised (price stays under 5.0 till March 30th). Our monocled fatcat J.R. receives after the month's close his 100.91100100BTC back and gets to keep his original 10.426717204BTC, thus turning a little over 10% profit.

Alternatively, suppose that on March 25th the price of BTC/USD reaches 5.55 and John R. Bitcoiner is exercised upon. He will owe .55 (5.55 - 5.0, the strike) * 100 / 5.55 = 9.909909910BTC, which is subtracted from his collateral (100.91100100BTC). He then receives 91.001091090BTC back and his contracts are now closed. Overall, between 91.001091090BTC back from his capital and the 10.426717204BTC he made earlier he has received a total of 101.427808294BTC, which means a slight profit over his 100.91100100BTC expenses, in spite of the execution (and the price moving close to a dollar against him).

Even more alternatively, suppose that on March 23rd J. R. is unhappy with the looks of the market, so he decides to close his position. He then goes through the procedure outlined in step 1.a. above. Let's say he buys back the 100 Calls at a price of 0.65342912 each while BTC/USD = 5.05. This means he owes 0.65342912 * 100 / 5.05 = 12.939190495BTC. Once he sends these MPOE closes out his short position, sending back his collateral (100.91100100BTC). Thus he will have paid 100.91100100BTC + 12.939190495BTC and received 100.91100100BTC + 10.426717204BTC, making  a 2.512473291BTC loss in the process.

Step 3. It is also possible to enter your own quotes in the system. Suppose the Calls @ 5.0 are quoted by MPOE 0.48484235 BID 0.92788600 ASK. If Jane. H. Bitcoiner buys some Calls, she can then send an email to MPOE asking for them to be listed for sale at say 0.9012865. Later, John R. Bitcoiner coming along would not see the original spread, 0.48484235 BID 0.92788600 ASK because the spread would include Jane's quote, and it will look like 0.48484235 BID 0.9012865 ASK. There's no rule that Jane has to ask for less than the quote offered by MPOE, she can ask anything she wants. If the price moves to expose her she will show.

John R. Bitcoiner wanting to buy CALLS would see on his buy page a market depth announcement, as for instance in our first example above "(Sell side depth: 50 @ 4.65)". In his case, saying Jane bought 100 Calls and she's offering them for sale, and John is looking to buy 200 Calls, his page would show "Sell side depth: 100 @ 0.9012865 + 100 @ 0.92788600".

If John buys these 200 Calls the quotes would return to their original condition (admitting no time has passed and the price hasn't moved). If he offers them for sale the same thing would happen again, except with that quote. Jane having her options sold would receive 0.9012865 * number of contracts bought / bitcoin price minus 1%. The 1% is a fee MPOE charges all sellers (not buyers). On top of this Jane would have to pay 0.1 BTC fixed fee for the listing.

Phew, that was quite the long story. But anyway, I think now it should be clear how MPOE works. If there's anything still unclear don't hesitate to ask tho'.