Bitcoin Forum

Hi All

I wanted to start selling call options over bitcoins.

It seems that people have tried this before and it is not gone well but I see no reason why it should not work if done properly.

Would appreciate input as to why this might be a bad idea.

You need to have counter party and someone foolish enough to buy the call.

And how much collateral are you willing to put up for selling the call option?

How would you go about doing this exactly?

Is there some sort of market infrastructure already in place to allow this?

I think this is a great idea.  Just like any securities market you need some confidence that both parties will honor the deal, e.g. escrow.

So for example, one party pays X for the right to buy a bitcoin form you next month for (say) 600 USD, has to have confidence that you will honor that deal if the bitcoin is at 650 USD.

I would think an exchange could do this fairly easily, they would just encumber your bitcoin balance until the option expired or was exercised.  Of course, the exchanges has to be honest and reliable.... (Yes I'm looking at the grave of Mt. Gox)

Good Luck!

For one, the user name you chose is pretty poor.  It's like sending in a resume for a job and listing your contact info as suckmyballz@gmail.com

So taking into account initial feedback I guess I would have to put sufficient bitcoin with an escrow so that the option holder had confidence that the call would be honoured. So as long as the buyer trusts the escrow then it should work regardless of whether people like my name or not.

Does anyone think that people would be interested. If you want to be long bitcoin it may be better for individuals to hold an option, depending on your risk preferences and what you want to use your money for. I would basically be sacrificing my upside but gaining some income now.

I am not really interested in setting up a market or anything so it would just be a private agreement mediated by an escrow.

Once you have your buyer of the call, I think this might be the platform?
(and I would be the agent?)
https://bitcointalk.org/index.php?topic=714005.0

There is already a future margin and margin exchange offering leverage to traders.

Bitfinex offers margin leverage - 2.5 X, IIRC.
Not exactly the type of action an option play would bring.
Not suggesting Bitfinex either, total return swaps are a recent concern:

https://bitcointalk.org/index.php?topic=667105.300

https://bitcointalk.org/index.php?topic=713722.0

I'd be interested in selling calls on DRK.
(There's always betmoose.com, I suppose ;D ;D ;D)

There are also a few binary options for btc offered by various brokers.

This is still not the same as buying options. Options will provide a speculator massive leverage (often several hundred "x") in the event the market moves in his favor, while limiting his downside to his initial investment in all scenarios. Margin on the other hand offers a small amount of leverage, but a speculator can lose his initial investment and all of the money that he borrowed to finance his position.

I offered such a service here: https://bitcointalk.org/index.php?topic=557743.0

but there was nearly no interest for it, even though it was with 100% collateral in escrow.

I would be an interested buyer (at the right price of course) if it could be done properly. The idea of the full balance of coins in escrow (as per TwinWinNerD's proposal) works. In the options world this is called a "covered call" because you are selling the right to buy an asset which you already hold so your obligation is covered.

Even if the interest is not there yet, it will come. This is a necessary part of any developed financial eco system. It also opens up massive potential for hedging bitcoin to USD for payment processors and companies accepting bitcoin.

I am still very much open to writing call options (covered) for shorter terms (at max. 1 month). Just PM me or reply in the other thread and we can work something out.

(will probably only reply tomorrow though)

Twin,

You are willing to write a covered call - isn't the OP wanting to sell a call?

Aren't you both bearish - on the same side of the trade?

Yes. I wasnt responding to Op but to TheGull

Actually I would also be willing to buy at the right price, I am not bearish or bullish per say I just think it is a pity that such a volatile asset as bitcoin does not have an active options market.

Let us know what size call you might be interested in buying and over what time period. I will have a go at pricing the option and if we can agree on a fair value then we can deal or maybe TwinWinNerD and I can take half the action each.

Covered call is same as naked put.

If you are trying to benefit from the interest portion, you can check out ICBIT on future contract.

How is a covered call the same as a naked put?

arbitrage001,

Are you using ICBIT currently with success?
Feedback on this forum about ICBIT haven't been exactly stellar:
 
https://bitcointalk.org/index.php?topic=254675.0
https://bitcointalk.org/index.php?topic=164255.0

You really need to study, practice and observe various option strategies before trying it using real money.

There are good reasons why option isn't popular on bitcoin and isn't feasible for exchange to allow option trading.

Yes. Heard the accusation on manipulating settlement price on closing date.

This is true for any exchange, be it bitcoin, commodity and currency future/option on contract settlement date. The only thing differ is the players (could be either exchange, market maker, suppliers or the speculators.)

I am only interested in the interest rate component of the contract, and I don't wait for the settlement date to close out my position. So the scam/cheat, if exists, do not really have any effect on my trading strategy.

One thing I am not happy with ICBIT is the withdrawal. They don't pay network fee so withdrawal confirmation takes anywhere from 4 to 12 hours.



EDIT:
For the bucket shop accusation, it has no effect on me as I don't use leverage and hence zero chance of force liquidation.

 bet on binary options, similar

 http://www.btcbins.com

As a bitcoin holder Naked short put is not the same as covered call.

Basically I would be levereging my losses when issuing short puts, while covered calls wouldn't influence my downside at all.

Observed from a "Zero asset" position, your argument obviously holds true, as the payoff of both should in theory be the same.

Additional, I think that people pay a way higher than fair premium for calls, but don't do that for puts. You can see that on bitfinex, where shorting is nearly cost free!

Creating a new position to cover your existing asset is synthetically equivalent to selling your entire bitcoin holding and then naked shorting same amount of put. Risk and profit will be identical, only difference is the commission and the spread of the option.

If you already have bitcoin, assuming the spread on call and put are identical, then selling call to make it a "covered call" strategy is of course cheaper than selling all your bitcoin then shorting some puts.


Shorting bitcoin itself is entire different thing. It costs little to short because everyone is expecting the price will go to the moon. That is also the reason why it is hard to make a market for option. No one will pay for put while anyone that is risk caution will not write naked call, the spread on each call and put will make it impossible for risk neutral strategy called "box".

Exaclty! Well said.

And about Icbit, you can kinda simulate options, but in the end only options work like options. That's why I'd prefer to issue Calls myself. I don't like futures really, but maybe I am on my own here ;)

I'll do a little experimental play (option on 1btc 30 days US style strike 650 basis Stamp). Pm me if interested.

I will offer strike price of 1000 and 1200 call for the following date if anyone is interested:

March 31st, 2015
June 31st, 2015
Dec 31st, 2105


Price will be determined at the time of the dealing. Might be willing to do deal for other date and price, but only in bitcoin (no alt coin).


Send pm in interested.

How would you settle the 2105 strike price? It is not possible to force someone to assume debt when you die, so there would not be anyone to ask to payout at this time.

Another issue is that it would be very difficult to enforce this contract as you cannot seize bitcoin from someone. If you were to use escrow, the escrow would need to hold massive amounts of bitcoin from you because of your unlimited exposure.

Are you serious? It was obviously a typo.....

Edit: To your point: "Escrow would need to hold massive amounts of bitcoin from you because of your unlimited exposure."
This is completely wrong, as no matter how high 1 bitcoin gets, 1 bitcoin can never be worth more than 1 bitcoin. So for an option amounting to 1 Bitcoin, only 1 Bitcoin in escrow is needed.

The 2105 one is a typo, should be 2015.

But the risk of death is real. If there is a need for assurance, I can make arrangement with trusted exchange regarding any deal I have with buyer here.

As for the liability part, TwinWinNerD already explain it. I only need 1 bitcoin to cover each call I wrote. So there is no risk of insolvency on my part. In fact, since the premium for long dated option is high, and I am getting paid in bitcoin, the higher bitcoin go up, the better off I am.

what is the collateral?

Full collateral. So for a 1 BTC option, the collateral = 1-Option Fee

You would still need to have the entire amount (the full 1 BTC) held by escrow in order for the buyer to potentially be safe. Even still both the buyer and seller would need to place massive amounts of trust in the escrow service as this would be a very long term deal. Escrow is trusted today because the transactions are very short term (the time it takes for goods to ship) but there are a number of things that could happen that would cause escrow to no longer to be interested in/involved in bitcoin/these forums.

I just sold a call option to a forum member. Deal was by private negotiation. It is not that hard.

Mind posting the deal in detail? You don't have to disclose the name of the person.

+1 on this. Deals like this should really be done out in the open. It would give greater transparency and allow for the community to get a better understanding of the BTC economy.

It is really at the discretion of the client whether or not details are released. I may post implied average volatilities if I end trading with enough people to get a reasonable stat.

Excellent.  I agree the deal is not hard, the only issue is their confidence in you to deliver.  I know you don't want to give away any details, but in general terms how you handled the "trust" aspect of the arrangement would be helpful.

Good Luck!

Curious as to how you all priced the option?   What sort of assumptions etc.  I am assuming given the unknowns using something like Black-Sholes would not be useful.

Thanks,
Jack

If you are intersted in pricing BTC options, this thread could be a good read for you!

https://bitcointalk.org/index.php?topic=557743.0

You should really use escrow for these types of long term deals.

I would be like to know how much you sold the option for and what the terms of payment are.

I just accepted a bid. I did use Black-Sholes to check that the bid was reasonable, the problem is working out what kind of volatility to use. Current volatility is lower than historical volatility. So it depends on what you believe about the future volatility of bitcoin. My view is that past volatility is more to do with Gox than bitcoin and Gox is gone thankfully.

Also the trade was purely trust based (offered escrow but for the amounts involved the buyer was unconcerned). In the long term this is the only way any business can be sustained. Look at services like "spendbitcoins" he has been going since very early days and never ripped anyone off. I would be confident to make a million dollar trade with him because of his record. I would be willing to take the risk of a small trade with someone new to see where it goes and in that fashion one can build trust over time. Any scam involving options can only last until someone tries to exercise. So as long as people are trading relatively short dated contracts a scam would not be able to be sustained. The main issue is the risk that an option writer dies or goes broke and that is where collateral and escrow will become important.

I would be very surprised that the buyer would decline escrow for this kind of transaction unless the call option was for well under 1 BTC. The buyer would not only need to trust that you would honor your agreement, but also trust that you would not just keep his $1,100 or however much money (per BTC) when he sends it to you when he exercises his option.

He is making false claim for a deal.

He needs to post the blockchain transaction and deal to prove otherwise.

How much BTC would you be willing to bet that the claim is false?

I don't think a TX ID would really prove anything, nor would the counter-party confirming they were on the other side of the trade. The OP could easily just find a TX that matches the amount he is claiming, and he could easily use a 2nd account that the OP controls to claim to be on the other side of the trade. I really don't think he is getting any additional trust from this deal so proving the TX is really not relevant.

Exactly as Mobius says.

In addition if I did post the details there would be only one outcome. People would argue as to whether the option premium is too low or too high. People would claim I was an idiot for selling too cheap or that the buyer paid too much or they would still claim that I was making it up. In hindsight it was a mistake to inform the forum that any deal had taken place. There are probably lots of OTC derivative transactions on Bitcoin that nobody is aware of for exactly these reasons.

I would bet .01 that it is true but there is really no way of knowing for sure. The Op could easily fake a TX and a 2nd person to do the option with. I think a lot of people are watching this thread for educational purposes as long term options for bitcoin could dramatically change the bitcoin related economy.

Guys, you may want to have a look at my website https://coinut.com. It's a platform for you to exchange options. To ensure the fairness of the platform, we strictly disallow any members in the company to participate in any trading activities using this platform. Our profit comes from commissions only.

You probably need to find someone with trusted status to endorse your platform or have him hold enough collateral that we know you won't run away with customer money.

is the site officially launched? Better add some color to it too.

Thanks Bogleg, I don't mind disclosing my identity and location information if people need. I am a graduating PhD student in a prestigious university of Singapore. It won't make much sense for me to run away. And I guess this will work out better than using a Sr. account here, right?

Thanks to Albert, yeah, we just launched it yesterday. We are still working on a more appealing interface. But we want to attract the first bunch of users at this moment to attract some VCs.

Guys, I need a market maker to provide liquidity. I cannot do that by myself because it violates our rules.

I don't think option trading not on full, liquid exchange can work well.  
Selling options is shorting volatility (a bet that implied vol will be higher than realized vol), which needs to be hedged. On exchanges, hedging automatically provides collateral, ie. sold atm call option for 1 btc is perfectly hedged by a ~0.5btc long, so even at impractical 100% collateral, you only need 0.5 btc more. The total is always 1btc.

On a purely options exchange with 100% collateral, you need 1 btc + enough collateral to go long 0.5 btc on another exchange, and in the worst case, enough to go long 1 btc. That's two times more expensive and requires additional hassle.    

You do not necessarily need to hedge your exposure to volatility when selling an option. This is only true for entities that trade options professionally to make money off of the changes in pricing of options. There are plenty of "non professional" reasons to trade options (for example to speculate, or to generate additional income).

In order for an options exchange to work properly, it will need to have some kind of central clearing house that guarantees each trade, and the clearing house will need to demand that the other side of the trade put up sufficient collateral (bitcoin/fiat to cover a short position being exercised).

Our platform requires the sellers to have enough margin (collateral) so that they will be able to pay the buyers at expiration.

You will probably need 1:1 collateral due to highly volatile nature of btc.

Right. We currently provide binary options only. The seller needs to reserve the maximum possible payoff as the margin. We are still working on vanilla options. As you said, we will probably require much more margin than normal vanilla options.

I don't think this would be necessary to have 100% collateral for shorter term option sales. The reason for this is because even though 1 BTC is to be delivered upon expiration the net value of an option may only be .5 BTC if the price of bitcoin is twice that of the strike price. The result would be that the buyer of the option would deliver the cash to the seller's account and the cash would be used to purchase the amount of bitcoin the account is short

In Coinut, we currently provide binary options, and the payoff is 0.01 BTC. The seller does not need 100% collateral (0.01 BTC) because he will get some premium from the buyer, which can then be used as the collateral. For vanilla options, the situation is a bit different as the payoff depends on the spot price at expiration, and thus it is not determined beforehand. Again, we don't need 100% collateral (as we don't know how much it is). We liquidate the seller's positions when he is short for collateral (this is essentially a margin call).