Bitcoin Forum

On OCT 31 CME announced listing of BTC (BTCUSD) futures. 1 contract is of 5 BTC.

I am anticipating BTC options. My question is how to estimate BTC option premium?

It is common to use an “option calculator”. Among the others I should provide 2 most valuable parameters: HV and interest rate.
Ok, I can calculate HV. Should I just set “interest rate” to 0?

Most people believe in BTC’s getting more expensive.
HV (historical volatility) is just a scalar. HV does not consider the fact that Bitcoin has revealed a significant growth these years. The only way to point on that “insight” (uptrend) for an option calculator is to use “interest rate”.

Instead, I examined BTCUSD time series. First, I switched to BTCUSD price deltas: BTCUSDi-1, BTCUSDi -> (BTCUSDi – BTCUSDi-1)/BTCUSDi-1, …
This chart shows BTCUSD price deltas cumulative distribution function:

https://s7.postimg.org/8w12iklyj/Pic_Distribution.png

Given the chart I was able to implement a simple algorithm:
1) Price = InitialPrice
2) Day = 1
3) Price = Price + Price * ∆
4) If Day < 31 Go To 3

where ∆ is taken from the cumulative distribution function (table).

This way I made one iteration and got a hypothetical BTCUSD price after a 30-days period.

Now let’s assume I am holding a European CALL BTC option.
Initial price is 8 100 USD per 1 BTC.
Strike is 8 100.
Term is 30 days.

Let the price be 8 600 USD after 30 iterations. I am buying BTC at 8 100 and my profit is 500 USD.

What if I repeat this calculation 10 000 times?
1) premium = 0
2) iteration = 0
3) price = f(InitialPrice)
4) profit = price > InitialPrice ? (price - InitialPrice) * 5 : 0
5) premium = premium + profit
6) If iteration < 10 000 Go To 3
7) premium = premium / 10 000

https://s7.postimg.org/dv7ezhxob/call_put.png

blue dots are individual option buyer's profits.

European CALL / PUT options
BTCUSD price is $8300
Strike is $8300
Term: 30 days
Volume is 1 contract (5 BTC)

-	EUR BTC CALL	EUR BTC PUT
Premium	$7877	$1925

Personally, I can't believe the market will reach a consensus around premiums like these.

Summary:

• The Black-Scholes model is hardly suitable for BTC option premium calculation as BTC is a very trend asset
• Using BTC price distribution / Monte Carlo simulation we obtain contradictory results

My question is:
- how do you estimate a "fair" premium for a BTC option?

I think no one here is able to answer your question. It's too early to decide. My opinion is this technique is not applicable here yet. Options are good on effective markets. Here? I wouldn't even try to use it until it becomes more predictable. Now you can only guess how to find the fair premium :)

The buyer guesses. So does the seller.
By having the right "calculator" I (hypothetically) am able to find some "unlucky" guesses.

If all the offers are overestimated - even better - I can make my own one.