Bitcoin Forum

Update: We are now open (https://bitcoinopx.com)!

A big thank you to everyone who helped us during Beta testing. Feedback resulted in exciting changes including 24 hour 7 day trading, and formula based escrow requirements to back options. Please see our updated How it Works (https://bitcoinopx.com/how-it-works) page for details.

Congratulations to winner Ichthyo, who sent in the most useful bug information. Ichthyo will be sent a 10 BTC prize. Please post your wallet address or reply to the PM I'll send you  :)

Happy trading everyone!
______________________________________

Greetings!

We are very pleased to announce BitcoinOPX -- a new trading platform for Bitcoin options.

Of course the timing of this announcement isn't optimum because the community is currently coping with a major security incident. This unfortunately reflects somewhat on all Bitcoin businesses.

However, this may be a good thing. For example, at BitcoinOPX we have raised our security consciousness to the highest possible level. The community probably expects nothing less.

I'll outline exactly why we can be trusted below, but first some key points.

1. We are now open in beta test mode. We invite the first 100 people to sign up and help us test the site. A 10 BTC prize goes to the user finding the most (or most severe) bugs as judged by us. If no bugs are found a winner will be chosen at random. Everyone starts credited with 500 BTC and 500 USD (play money).

2. Barring no site issues we will open to the public Monday June 4, 2012.

3. The quickest way to get up to speed is read our How it Works (https://bitcoinopx.com/how-it-works) page.

We invite everyone to visit: https://bitcoinopx.com

Update: We now structure options as contract for difference (traders don't have to own underlying bitcoins), and call and puts are equally covered by escrow. Please see the updated How it Works (https://bitcoinopx.com/how-it-works) page!

http://img513.imageshack.us/img513/861/screenshots2.png

Security

We take security seriously.

One thing we do is link to a Security page (https://bitcoinopx.com/security) in our site's footer. This page describes transparently how we secure our platform. I'll list the points here.

• Most importantly, we don't use a "hot wallet" which has been at the center of security breaches. Options trading doesn't involve heavy transfer of funds based on round-the-clock exchange rates. We do not host bitcoins online, and no funds are stored on the site. Instead, we manually approve all withdrawals in about one hour.
• We use the Armory client cold storage method to store bitcoins which is extremely secure.
• We use secure password management. Passwords are never emailed, and are handled with the highest level of security. Users don't choose their own passwords, which can be weak or unlock their other accounts. Instead strong passwords are assigned, then salted and hashed.
• We do offsite backups frequently.

We've spent a lot of time, effort, and planning to bring easy Bitcoin options trading to the Bitcoin community. Please sign up and help us test as we seek to add a valuable service to the community.

Good security decisions, thumbs up!

Thank you. We hope having a transparent Security page is something that is emulated.

The site looks beautiful and this is definitely a needed service in Bitcoin land. The fact that you've integrated Armory says good things about you :)

I'll be trying this later today!

Thanks, and I agree this service may be welcomed. The site comes directly from my own desire to trade Bitcoin options but having nothing suitable available.

Wow the site looks really beautiful and I commend you for your actions in the security department and wish you all the best!

I'm already trying it out and will let you know how it works.

Thanks! We don't think a few bad hackers should ruin a good thing (Bitcoin) for everyone.

Most of us in Bitcoinland expect the price to shoot up in the future, maybe as soon as a year away. Options can add some interesting opportunities based on that. This is why we make sure they are covered by independent escrow. They are guaranteed to be delivered no matter what price they are.

what was not entirely clear:

will you yourself be the counterparty in this trade?
or are you also matching buyers+sellers but for options?

Where should the tester leave feedback, here in this thread?

Thanks for the question.

Things are not set up for me to be a counterparty, but I could be. The system simply lets anyone create an option then sell it on the open market. Let me walk through an example. You are user-A and I am user-B.

user-A (you) decide to create a CALL 100 option for 1 year from now, with strike price of $5. You don't think much about the future of bitcoins. You think they will hold steady at $5.

You buy 100 bitcoins on Mt.Gox and use that to create your option on BitcoinOPX. You then place that option on sale with a price of $100, which you think is a good deal for having your money locked away for 1 year (20% return if you're right).

user-B sees this option, but I'm a big believer in Bitcoin. I think 1 year from now they will be at least $20 each, probably more like $50. That means I would have the right to buy 100 bitcoins at a cost of $500 at Maturity. However, my projection is their true value would be 100 x $20 (or $50) = $2,000 (or $5,000). That's a profit of $1,500 (or $4,500) if I'm right.

At that rate I think paying $100 for the option is a good deal.

When you create the option the bitcoins are placed in escrow with an independent escrow service. This means all options can be settled, if need be, without BitcoinOPX in the picture at all (say if shut down for legal reasons). However, with things running normally, every Friday when options mature BitcoinOPX requests back the required number of bitcoins from BTCrow, and settles all member accounts appropriately.

I hope that makes sense.

Edit: I changed the above wording to a more logical thought pattern for profit from each user's perspective.

Anywhere you like. You can post here in the thread, send a PM, or email us at info@bitcoinopx.com.

Hmmm don't get me wrong, the site is beautiful but functionality is somewhat unintuitive. For example I don't understand what is the difference from creating an option when I click on "My account" and clicking on "Trade" and making a "Sell to open" order.

For instance I have two orders up right now, one is a 1 call 10 option which I created and was debited from my balance and another for 4 contracts of call 10 at the same strike that didn't get debited from my balance.

The order book is also a bit confusing and the manual updating is a bit annoying. It took me a while to figure out how to use it, especially why the strike price setting is important.


So yea, no bugs so far, I'm just a bit confused between the different actions I can take on the Trade page and on My account page and don't understand why these two aren't simply 1 page together with the order book.

Also you might want to rethink the placement of the reset password link to somewhere a bit more appropriate like next to my username or something.



These are my initial observations which may not carry any weight at all since I'm a noob when it comes to options trading. And another thing that I'd like to see somewhere is an indication when the market is open.

This is excellent feedback! Thank you. Let me try and have a look at what  you've done so I can respond.

Another thing I just noticed is that the order book only shows the price of the first (I assume) best priced contract at a certain strike price without showing how many are available. For instance I now created another 5 sell to open call10 orders at a worse price and they aren't shown in the order book.

Also the event calendar is a bit distracting since it has no bearing on the market but it is a calendar and it took me a while to actually read the word "event" and stop thinking it had something to do with finding contracts on other dates, so maybe minimize it or move it something.

Ok, you have a good point here. You can only "sell to open" when you have something to sell. So placing that type of order without first creating an option wouldn't get executed until you created the option. There should probably be a message indicating this.


Right. The CALL 10 you created is what you have to sell. When you click Trade you are either buying options others have created, or selling options you have created, or selling options others created which you bought but are now re-selling.


I'm not yet sure how we might improve this. The manual input is only when you first click Trade. If you click a "trade" link in the Option chains chart below it will pre-populate the fields. It will also do this when you click on "sell to open" from the link in My Account for options you have created.

Edit: Ok, I believe you're calling the option chain chart the "order book". I was describing the section to place orders above it. I can see your point about the strike price setting. I'll think on how to improve that.



I'll look at ways to make this clearer.


Good idea.


This was thorough, honest feedback, which makes it extremely valuable. Thank you!

That's ok, I'm sure if you could you'd do the same for me ;)

When creating options could you also give the option of how many option contracts of that type one wants to create so I don't have to create every single options contract separately.

Yes the option chain (which you refer to as the 'order book') shows the best priced offer for bid and ask. Showing how many more orders are available is not typically shown in traditional options chains. For example here:

http://finance.yahoo.com/q/op?s=GOOG+Options

Don't ask me why not. We are blazing trails with Bitcoin, so maybe we should consider questioning all kinds of practices ;)

What is shown, however, is the trading volume and open interest (http://www.investopedia.com/terms/o/openinterest.asp#axzz1wDIHyAVI).


Well, options trading is interesting in that the option value is derived from what people think will happen with the price of the underlying asset. A calendar of events which might be perceived to move the real price one way or the other is relevant I think. However, I will consider your suggestion to move or minimize it.


Of course! In Bitcoinland we've got each other's back. :)

I agree about adding a quantity field there.

Hmm that's interesting, slightly confusing but interesting. Obviously I have zero experience actually trading options on a platform so I have no idea how the pros have it setup but it's kind of weird not being able to see the depth of the offers. Also I was thinking maybe you should also give the option of making a market order, not just a limit order.

Hello BitcoinOPX,

now I've toyed around a bit with your site. Looks great this far. Had no problems using it.
I've found some minor or technical issues, I've emailed you those to your support email address.

I'd like to add some notes regarding usability.

(1) Creating options is a bit hidden. If I'm right, its only accessible via "my account". Well thats arguable;
     probably your reasoning was that people more often buy/sell options, then creating options themselves.

(2) Regarding support for people not so familiar with options. How about integrating some kind of calculator,
     or at least displaying an effective base price? For example: If I create an call-10 option @ $4 and then offering
     it for sale at $11.5, then what I'm doing effectively is to sell 10 BTC at a rate of 5.15 -- well, actually I hope
     to do such a deal, and I'll plan it for a future day.

Basically people familiar with trading handle numbers almost intuitively and / or use a calculator frequently. But hey,
why do we have computers today? Why shall I do number crunching in my head or use an external calculator, when
a nifty little javascript could do the calculations for me right in the webpage? Just my €0.02

-- Ichthyo

Yes, I believe it's because people might place fake bid/ask orders to make it seem they are thinking something about the price they are not. Option value is highly subjective. Open interest for this reason can be a better consideration.

There are many things the platform doesn't currently support which it could. Options trading is perhaps the most complex trading there is (what with straddles, strangles, butterfly strategies etc).  Our aim was simply providing the most basic functional (hence less bug prone) version to start.

Thanks for the feedback! :)

Regarding point #1 you are right. I'll look at expanding the placement of the create option link. On point #2 I agree also. There should be some kind of default calculation done.

You might want to verify email addresses.

You might want to delete the event calendar as it is clutter.  Unless you plan on holding online trading workshops or other events that are very strongly connected to bitcoin option trading.

I placed an order for a negative quantity at a negative price.

Hello,

expanding on that idea: especially, if such an embedded calculator could also include the fees, then this feature would start being helpful beyond just being a convenience. Especially regarding the 10 BTC options, the fee is actually a quite considerable factor.

Another usability related proposal: When I create a buy / sell offer, "confirm" brings me to a page showing all the details, including that fee. Well, if I now decide that my choosen limit wasn't appropriate, factoring in also the fee, then there is no way just to correct my order. All I can do is to "cancel", which discards all the values in the form. This is especially annoying when I entered that order values by clicking on the link "sell to open" after having created a new option. Because then I have to go back to "my account" and click that link again, and then recall the corrected limit price. Of course this isn't a real obstacle, but it isn't a smooth experience either.

-- Ichthyo

Both probably good ideas.

LOL  :D

Thanks, definitely a bug.

This works with a call option but does not work with a put option.

user-A (you) decide to create a PUT 100 option for 1 year from now, with strike price of $5. You don't think much about the value of bitcoins dropping. You think they will hold steady at $5 or maybe rise.

You buy 100 bitcoins on Mt.Gox and use that to create your option on BitcoinOPX. You then place that option on sale with a price of $100, which you think is a good deal for having your money locked away for 1 year (20% return or more if you're right as your collateral bitcoins can also go up in value).

user-B sees this option, but I'm a big believer in Bitcoin crashing. I think 1 year from now they will be no more than $0.004 each, probably more like $0.001 each. That means I would have the right to sell 100 bitcoins at a cost of $500 at Maturity. However, my projection is their true value would be 100 x $0.004 (or $0.001) = $0.40 (or $0.10). That's a profit of $499.60 (or $499.90) if I'm right.

At that rate I think paying $100 for the option is a good deal. But there is a problem the collateral backing up my $499,60 or $499.90 profit is only worth $0.40 or $0.10 as the case me be. Ouch!

Moral: You need to escrow USD and BTC not just BTC.

Both good points.

It's also possible to create a single buy to open call10 order where the price exceeds your balance. Is that also a bug?

Also, how can cancel options I created?

Agreed, the calendar just uses up screen real estate. Any ideas how to use that area more effectively?

One thing which I'd expect to become difficult, when using the site for real: Where are actually offers available?
Let me explain: Basically you offer a maturity date every week. But you intend to cover a huge range into the future. Now, let's assume I'm interested in buying some option "roughly a year into the future". This would force me to flip through several pages of orders, just to find something suitable. :-/  Unless your service catches on exceptionally, I'd expect those orders to be rather sparse and scattered. Or do you intend to engage into market making?

I'm not sure how to do this, but maybe someone has a striking idea: some kind of a scrollable timeline, where we can see the density of options available for sale? Maybe even some indication of the weighted average at a given point in future? At leaast, I think, such a graph would be more helpful than that calendar ;-)

-- Ichthyo

Yes, puts are a bit of an issue. As noted on the site our escrow service only accepts bitcoins, likely for legal reasons. We didn't want to not offer puts, so the half-measure of sticking with BTC was taken. The reasoning is only short term puts will trade much (probably discounted), because of the growing risk of default as time lengthens.

If things go well with the site, however, in time there may indeed be USD backing puts as would be proper.

Yes but can't you find anyone else to escrow USD? There is no need to use the same escrow service for both USD and BTC.

No, the system will accept any order you place. It assumes you know what you're doing and that you will add funds as needed. The order won't execute of course unless you can afford it.

You can't cancel options you've created. It warns of this in bold on the page. This is because the bitcoins used as collateral are sent to an independent escrow service. BitcoinOPX loses control of them.

Ah I missed that but it makes sense. So I get my money back once the option expires, right?

I suppose that's true... the idea was trying to keep things simple in the minds of users. It would also take finding someone already with a track record of trust and willing to be transparent. But I suppose it's not impossible...

Yes, you get your bitcoins back if the option is not exercised.

If I create multiple options for the same strike price, all of them get the same "Symbol". Moreover, starting with the second such option, the link sell to open dosn't disapear after being used. Maybe both things are related?

-- Ichthyo

Yes, the option symbol describes the maturity, srike price, and type of option. So multiple created contracts can have the same symbol, just as multiple shares of a stock have the same symbol.

You would "sell to open" each of the option contracts you created separately. Theoretically they could be grouped for convenience, and that function may be added. Of course, you could also just adjust the quantity of the sell order you placed for the same symbol.

$5000 is listed after $7500 in the USD strike price list.

Also: "Limit: $inf" when putting an insanely high limit value. Just a display issue, the order seems to be $99999999.99 Limit.

Got it, thanks! :)

Transactions can be issued for a date in the past:


Strike price can still be negative (is this intended?).

Edit: I think some bounds checking would help for the strike price:

Also, the withdraw options look like they may be vulernable to CSRF attacks (but considering the diligence your website has on all else, there's probably already a confirmation page). Just thought I'd let you know, in case.

Thanks, working to fix that. The withdraw options are not vulnerable to CSRF. They are not operational during testing. CSRF attacks have been screened for user actions.

Sorry, maybe I've failed to state the problem clearly.

When you create a new option, you get a link "sell to open". You can click that and get the form fields for the order pre-filled properly. Especially in this case, most form fields are gradey, i.e. you can't edit the values. Especially, you can't change the quantiy. All you can do is to fill in your limit price. After you've placed this order, the link "sell to open" is gone. All fine thus far.

But now, if there are multiple options with the same symbol, (i.e. either you created multiple options or you just re-played that post page request creating the first order), then the link "sell to open" doesn't go away, after you've placed your order. You could click that link again, and get the confirmation page, without a warning. Basically this way you can create more sell orders then you've created options to sell. While I take it that the system won't match such orders, such behavour is confusing at least. IMHO there should be a bounds check on the quantity, or do you deliberately want to allow people placing phantom orders which aren't backed?

--Ichthyo

That's correct. The system won't match such orders. This is similar to an earlier question about being allowed to place an order for more money than in your account. The system currently trusts the user to intend the action they take. It simply won't carry out the action until the required items are in place. There should probably be a warning notice given, though.

The password you gave me when I signed up was only 9 characters long.  I tried to change it to something much longer, but it won't let me.  Instead it just makes up new short passwords.  The most recent one it gave me was only 8 characters long.

I heard a rumour that some people in the Bitcoin community have serious hardware capable of brute forcing hashes remarkably quickly, and so would like to be able to generate my own secure password.

I find it hard to distinguish between regular text and links on the FAQ page:

http://i45.tinypic.com/6r2e0h.png

"this short description" is a link, but looks very much like the "You can read" text.  Is the colour slightly different?

This paragraph of the FAQ:

http://i50.tinypic.com/2z4dd7c.png

says "in this forum thread".  Is that meant to be a link?

Can't you just insist that the creator of the put option has sufficient USD in their account to cover the contact, and hold it in reserve for the duration of the contract.  In effect, acting as your own escrow service, at least until you find an escrow service that meets your requirements.

Thanks for all the great questions, and helpful feedback everyone!

I'll be off the board today looking into much of this feedback, and will return to answer replies.

Greetings everyone!

After working through much of the feedback given I have big changes to announce.

Contracts for Difference

Most notably options are now structured as contracts for difference. This allows several things. First, both call and put options are now covered by escrow (up to $150). Also, traders don't need to own the underlying asset (bitcoins). We have changed contract size to 100 or 1,000 BTC. Below is the example on the updated How it Works (https://bitcoinopx.com/how-it-works) page.

Bob creates a CALL 1000 option with strike price of $5.25. The current bitcoin market price is $5.10. Bob doesn't think the price will rise by maturity, and places the option on sale for $20. He pays $150 into escrow to cover the option.

Suzy thinks the price will rise by maturity so she buys the option. At maturity the price is $5.42, which is $.17 above the strike price. This means Bob would mathematically owe Suzy 1,000 x $.17 = $170. However, the maximum payout is $150 which is the amount Bob pays.

Please let me know what you think! I'll also respond to earlier questions.

-Id like to see 2 factor auth added. preferable something free for users, google auth, or anything else you find suitable would be good.

-I dont like my password being set by you. Id rather set my own password phrase. I dont even like being required to use a number or symbol but I would be fine with that if we can set our own. With you setting our passwords many people are going to be storing there password in notepad or some easy to access unencrypted file for ease of access.

That isn't a problem; no malware is going to waste time trying to log in with every file on a computer.

Hello BitcoinOPX,

do you still intend to offer the classical type of option too?
While this contract for difference option kind looks like an interesing think in itself, especially because of the capped risk, I still think that classical options are a sorely needed instrument for the bitcoin universe.

-- Ichthyo

If optoins are now payed as CFD, it seems that everything in this deal is denoted in USD. Optons are also traded in USD. Is there any reason to have a BTC balance on your platform then? It seems that the only think which can happen is to move USD amounts.

Its still not ideal.

Hey, thanks for the questions.

First on the subject of secure passwords:

@dooglus: the passwords we assign are extremely secure. What you are talking about is password cracking using brute force. That is not possible when authentication attempts are limited and/or time-delayed. We limit login attempts to 7 tries before locking the user out. That's impossible to crack by guessing. If you're interested below is a great article explaining secure vs. insecure passwords:

http://www.baekdal.com/insights/password-security-usability

@REF: we assign passwords to ensure they are both strong, and also don't unlock other user accounts. Even if users picked their own password but had malware install a keylogger their password would be compromised. On that note you do have a point about two factor authentication. This is one reason we require a security question/answer pair upon signup. It gives us another piece of evidence to identify users. We are conscious of the balance between great security, but with practical use. I do think it's a good idea and worth the relative inconvenience to add the second factor of user's security question for login and will add it.

@Ichthyo: we don't intend to offer the classical options at this time. We think users will buy, hold, and sell bitcoins directly with maximum flexibility as opposed to having them locked away in escrow.

You are right about less need for a BTC balance to be displayed. That will depend more on our plans to offer BTC/USD conversion service for convenience.

Suggestions:

- Allow the full option chain to be displayed.  My thought is basically that you need to be able to see the entire market for a specific maturity.  If you are worried about the list being too long, consider creating a "full list" button that allows you to see the entire list of puts and calls for a specific date.  It is simply too much time to scroll through the pages to see where other traders are across the board.

- Allow smaller lot sizes.  Most people won't put that quantity of currency at risk casually - if things go against them, they'd like to exit their option.  This requires liquidity and liquidity will only come to this if there are a few hundred traders participating rather than a dozen.  I'd suggest allowing position sizes as low as 1 bitcoin - this will fill up the order book and generate volume.  (Edit your commission appropriately ~ .065 cents / BTC...better yet, make it a percentage ~ .01% of the notional value of your position)

- Include a time and sales which allows traders to see the trade history - make it live if possible - I'd suggest working with Clark Moody (bitcoin.clarkmoody.com) to create something similar.

Thank you for reading, I wish you the best in your endeavors.

Goomboo

One more thing...

- I would be absolutely specific on how you calculate the closing price against which the options settle.  The reason is because it is easy to manipulate the price by 1-2% these days.  With the bid-ask spread around 5 cents, a single trade can make the closing price increase or decrease by a percent.  If a trader has a large position on and is close to the money, he can push the price around so that it settles in his favor, etc.  An example of clarity - I take the average of the closing prices for each hour.

- I'd just like to reiterate that it really is important to be able to see the entire market for a specific date in one screen.  I simply can't trade it if I can't see in one glance where the entire option chain is for a specific maturity.  Traders look to see what the market is thinking and weigh this against their view...if I can't see the market easily, I can't trade.

-I would suggest not capping the profit / loss on a trade.  This $150 is an arbitrary number and has nothing to do with the market price.  You are seriously limiting your customer base by capping their maximum profit potential.  One of the main allures for option traders is that the risk / reward ratio is beneficial.  By setting a cap on their reward, you are alienating a lot of potential customers.  Another problem with this $150 figure is this - does $150 make sense if BTC is at $100 / BTC?  See where I'm going with this - it's not a versatile figure AND it limits your audience.  If you limit your audience, you don't get liquidity.  If you don't get liquidity...etc.  I suggest that you have a margin requirement instead equal to ~20% of your notional position with the understanding that it is possible to have revenue shortfalls.

I really am excited about this product and the idea.  I plan on using it if it becomes a little more trader friendly.

Thanks,

Goomboo

@Goomboo: regarding the ability to show the full option chain, that's a great idea and it will be added.

- Regarding lot sizes we chose 100 and 1000 because of typical market conditions. Right now volatility has largely subsided. People who want to trade conservatively can choose the 100 size. Plugging 100 into the trade example above gives the following values:

Bob creates a CALL 100 option with strike price of $5.25. The current bitcoin market price is $5.10. Bob doesn't think the price will rise by maturity, and places the option on sale for $2. He pays $150 into escrow to cover the option.

Suzy thinks the price will rise by maturity so she buys the option. At maturity the price is $5.42, which is $.17 above the strike price. This means Bob would mathematically owe Suzy 100 x $.17 = $17.

As you can see the dollar amounts suddenly become very small. If volatility returns to be measured in dollars rather than cents, such as if the price per BTC is $100 then we may add in a third smaller contract size of 10. Please keep in mind a user can create, buy or sell more or less of the same option to adjust their profit potential. We are trying to keep complexity down for what users have to learn and remember.

- Regarding an ability to see trade history that was mentioned in this thread earlier. That's not typically information available with options traditionally. However, we may consider adding it.

- Regarding how we determine the closing price we are very specific. It is the 24 weighted average at Maturity taken from the largest operational exchange with the highest BTC/USD volume (typically Mt.Gox). By using the weighted average small market moves are not a factor.

- Regarding the $150 cap on payout there are several things to consider. First, remember we want to keep things as simple as possible. Second, any trader can adjust their profit potential by buying more or less of the same option, or picking a different strike price. If the BTC price reaches $100 we may make some adjustments, but there will be many other things going on if that happens as well.

Thanks for getting back to me.

Here's my issues,

"Right now volatility has largely subsided"
-Options are a method of trading volatility - after all, the largest component of the fair value of an option is volatility.  If you base your model on this current market environment, you've got a problem - things change and trying to manually change on the fly is a recipe for disaster.

"This means that Bob would mathematically..."
-You have a serious issue with the premium.  Suzy bought the option for $2 per BTC x 100 BTC = $200 [an insanely high price by the way].  This $200 goes to Bob, the seller of the call option.  Bob at most can lose $150 on the option due to the nature of your platform.  Bob actually made $50 regardless of what the market does!  I think you mean the $2 is actually the price for the entire 100 BTC, but that isn't how options (on listed securities) are quoted and I seriously suggest sticking with industry standards.

Additionally:

"The market closes at..."
-Why does the market close?  There is no feasible reason for a market to close.  Are you telling me that if it is night time and I want to trade, I can't?  This makes no sense.  While typing these comments, I'm trading the currency markets...

I'm noticing a trend of your product limiting itself.  Nearly every aspect of the product has an arbitrary parameter which makes this very difficult to use.  $150, market hours, lot sizing...there really is no reason for this.  In your attempt to make it easy on the new guy, you are alienating those of us who actually trade.

I like the idea, but I think you need to eliminate all these restrictions - the more parameters, the more difficult.  In fact, I'm noticing that almost every single one of my criticisms is in regard to a parameter that limits your customer needlessly.

Thanks,

Goomboo

@Goomboo: we don't base our business off the market environment, but we do base the products we offer on it. There is a difference. New financial products based on market conditions (like CDO's) do get created sometimes.

- Suzy didn't buy the option for $2 per BTC. She bought the option for $2. The reason Bob places the option on sale for such a low price is he doesn't think there is much profit potential for the buyer. He is only paying the price difference multiplied by 100. Since the price difference will likely be in cents he thinks he will at most pay out something in the tens of dollars (if he pays anything at all).

- Having the market close does have advantages. And you can still place trades 24 hours a day. They will execute when the market opens. The parameters we have are not arbitrary. Each decision has been weighed for pros versus cons. As traders ourselves our goal is to offer the best trading experience we can.

1.  CDOs.  You aren't creating a new financial product, options are quite old.  Also, CDOs have frequently been described as "weapons of mass financial destruction".  The reason wasn't the product, it was how people treated the product in a low volatility environment (and a lack of knowledge as to the creditworthiness of the product).  When volatility increased and their product and expectations were based on a low volatility environment, chaos ensued.  You can avoid this type of issue by simply allowing users to have dynamic lot sizing.  Just a little note - in the space of our dialog, the notional value of the smallest size you can trade on your website has increased by $10 due to a $.10 rally...dynamic sizing would let traders manage their risk appropriately while allowing the small guy to play too.

2.  The market closes.  So traders in Russian can never day-trade options on your exchange?  If Bitcoin moves $1 down overnight, I can't respond by covering myself with a put?  Yikes.  Derivative exchanges are typically open much greater lengths than the spot exchange.

I agree with your goal and support you in your endeavors - please don't misread my criticism for anything but trying to objectively help you create the best experience.

Anyway, best of luck with your exchange.

I personally won't trade on it with the advertised restrictions in place.  They simply don't make any sense to me - why limit someone without a very good and stated reason?  If I were to trade, it would be on an exchange that operates exactly like a standard option exchange except of course, that it is for Bitcoin.  There is absolutely no reason to get fancy and impose parameters on something that works and has worked for several years.

Best of luck with your endeavor,

Goomboo

@Goomboo - thanks for the feedback.

- regarding CDO's and new financial products. I didn't say we were creating a new financial product, I said we base the products we offer on market conditions. I'm not sure if you're trying to be argumentative. I personally don't like CDOs, but I brought them up to illustrate the point that financial products are not all static, because you said earlier "If you base your model on this current market environment, you've got a problem - things change and trying to manually change on the fly is a recipe for disaster."

I simply said we may offer a smaller lot size of 10 at a later time, if, for example, market conditions would favor that. By not offering it now all traders can consolidate focus on existing sizes creating more liquidity for the current offerings.

- regarding market hours, yes, traders in any timezone can trade the market; if they find value in the exchange they will set aside the necessary block time to trade.

The NYSE, NYSE MKT and NYSE Amex Options are open from Monday through Friday 9:30 a.m. to 4:00 p.m. That's 6 and 1/2 hours. They also close U.S. holidays. Contrast that with us. We are open M-F 6:00 a.m. to 6:00 p.m. That's 12 hours, and we don't close any holidays.

- I'm sorry if our exchange will not meet your needs. We hope you will try it. You may like it. We have tried to set things up to be favorable to a large group of traders, and obviously opinions on points will differ.

As I said every decision made has been weighed for pros versus cons. I would be happy to explain the rationale behind any parameter you have a question about.

I am not attempting to be argumentative.  This is my serious face :| and this is my argumentative face >:|.

Here's my reason for talking:

1. I have been wanting someone to put forth a serious effort to make an options exchange for the past year.  I became very excited when I saw that you actually had a good looking website and user interest.  I rapidly became dismayed when I actually read the details of the exchange and how things function.

2. You are presenting yourself as an entrepreneur - creating a new product for this community.  I really want you to succeed in your endeavor, that is why I am being brutally honest with the things that I (a potential customer) would like to see in your product.  I see that you are attempting to simplify the product and make mass appeal and I am telling you (as a member of the masses) that unnecessary limitations of your product really make it difficult to use.

As to your comment about the market hours: those markets are for options on stocks.  The stock market has similar trading hours as those exchanges.  These are for options on BTC, a global commodity which is not limited by trading hours.  Your logic for setting market hours based on stock market hours does not hold up.  It makes more sense to allow trading 24/7 just like BTC.


Please provide your justification for the following (in interest of time, I have provided my reasons against your settings below):

1.  Why do you have market hours for your exchange?
- Derivative exchanges (options / futures) should be (and are) open longer than the spot exchange
- Your market hours are arbitrary and do not reflect the real market for your underlying product (BTC: 24/7)

2.  Why do you require a 100 and 1000 BTC contract with no option for incremental sizing (1 BTC)?
- You would get more volume, more customers, and more liquidity in your product if you allowed small traders to speculate
- A 1 BTC option would allow all sorts of individuals to hedge existing positions or speculate on price movement
- As the price fluctuates, you are diminishing the effectiveness of your product - 100 BTC at $.01 / BTC is much different than at $30

3.  Why do you cap the payout to $150 dollars rather than setting a dynamic margin requirement for opening a position?
- A more logical system would be a percent based on notional value of the contract.  For example, 20% of the notional value -> 100 BTC X $5.00 / BTC * 20% = $100 margin requirement

You're setting yourself up for a lot of headaches by these needless restrictions.  If volatility returns, you're going to have to adjust your contract size / payout every week making your long-term contracts meaningless.

Maybe I misunderstood the purpose of this thread - I thought that you were inviting people to demo your product and provide feedback prior to the main launch on this coming Monday.  I want you to succeed because I have a high interest in your product.

Thanks,

Goomboo

I see a huge benefit to being open for trading 24/7. I'd be interested in hearing the advantages of closing for half the day. If you want regular downtime for maintenance/changes/settlement make it 1 hour per day.

@Goomboo and @FreeMoney: regarding market hours, yes, you are right FreeMoney that closing allows room for maintenance, changes, and settlement. It's also hospitable to conservative traders. Most finance, and indeed Bitcoin too for now, takes place in the U.S. The rationale was that doubling the hours of high volume exchanges like the NYSE and being open holidays would be welcomed.

However, the great thing about Bitcoin is the freedom it provides, including a free market and I'm confident if I were I to take a poll it would favor 24/7 trading. So we will offer 24/7 trading. We want the largest trading base possible so we will deal with the technical pressures on our end.

- regarding lot size I agree there may be some that wish to speculate "for fun", similar to penny slot machines in Las Vegas. Right now with volatility in the cents range, and the fact we have a .65 contract fee, 1 BTC wouldn't be mathematically feasible. However, I will add the 10 lot size.

- regarding the $150 capped payout, it is there so option value can be guaranteed and thus speculated upon. If we were to use your suggestion what would happen when a price movement forced a margin call, and it was defaulted? The option value would be compromised. How could people reliably trade options like that?

The $150 escrow cap is not ideal, but it does allow the crucial element of guaranteed value to be established. Traders can always buy or sell more or less options to adjust profit potential.
 

I agree - make it a small amount of time, preferably once a week (if needed).  The more up-time, the better.



I would suggest that you make your fee be BTC based.  Instead of $.65 per contract, make it $.0065 per BTC.  That would allow people to trade in whatever size they want.  Logically, your structure doesn't make any sense as is - you shouldn't pay the same commission for a 100 BTC contract that you do for a position 10 times that size.  Most serious brokerages charge you per volume you trade, not how many trades you perform.

The absolute best case for commissions however, is a commission based on the notional value of the trade.  Rather than a dollar amount per BTC, a percentage would be better.  I suggest a .15% commission.

For example:
-I buy a call for 100 BTC with a strike of $5.20
-I pay a .15% commission: 100 BTC * $5.20 / BTC * .0015 = $.78

The major benefit here is that you'll still be in business if BTC price falls to $.05 per BTC.  Think it through from a customer's standpoint - why would I use your service to trade BTC if the commission I pay is substantial in relation to the actual value of what I purchase?



Boom, you nailed it - welcome to the world of derivatives!  Derivatives introduce a whole new form of risk called counter-party risk: will the person on the other side of my trade pay up at the end of the day?  Counter-party risk is a huge component of trading derivatives and something that I think you were on the right track to answer, but I think you can do better.  I do suggest that you keep a required amount held in the customer's account, but allow the person holding the option the possibility of earning more.  Here's how:

Mitigating Counter-party Risk
-To open a trade, a customer must post enough collateral to cover a move in prices against their position equal to a reasonable amount:

Price Protection Move = (20% + number of weeks / 100) * (1 + number of weeks / 52)

-So the amount of margin they must post is: Absolute Value(Strike Price * (1+Price Protection Move) - Strike Price) * BTC of position

-Don't gloss over this, think it through.  Here's a chart showing what this looks like followed by an explanation below:

http://www.thetradequest.com/bitcoin/margin.png

Example:
-Someone buys a call for 100 BTC with a strike at $5.20 and a duration of 20 weeks
-The seller of the call must post $288
-At the end of 20 weeks, the price is $10
-Buyer should receive ($10 - $5.20) * 100 = $480.  If the seller of the option is unwilling / unable to pay, the buyer still receives $288.  I have some ideas on how to keep the sellers of options liquid that I'll get to in a minute.

Now here's the explanation - it makes sense that your margin requirements should be sufficient to cover reasonable price movements in a given amount of time.  The chart about shows a sample of what "could be" reasonable.  It is reasonable to say that prices could go up or down 20% in a given week and that the volatility on a longer timeframe is higher.  As it stands, who would buy an option 1 year out if the most they can make on it is $150?  The goal here is that buyers of options get paid AND they have the potential to make a killing on a trade.

How to keep the sellers liquid
-Sellers of options must post collateral
-This collateral is "flagged" and they cannot withdraw that amount or that amount is not used in calculating account balance for opening new trades
-Seller must maintain an account balance equal to the floating profit of the buyer of the option or seller's account is frozen until funds are received.  The idea here is that if someone buys a call at $5.00 and price goes to $50.00, we don't want the seller of the call running for the hills.  Any funds in the seller's account are seized (up to the necessary amount) until the contract expires.

Question:  Why are you anonymous?  You don't list any names, phone numbers or addresses on your contact page.

All the security in the world is useless if the theft is internal. 

I really should charge a consulting fee for giving any more information about how this stuff works in the real world.  I have more ideas of what I'd love to see in the platform and what would make a killer exchange, but I'm done with suggestions for now.

Goomboo out!

@mlawrence I'll reply to you first.

As I'm sure you're aware much of Bitcoin and the ecosystem growing up around it is in various shades of legal gray area. Some is specifically illegal, like online poker playing in the US.

Many Bitcoin businesses try to operate openly, transparently, and legally, even if they don't start off that way. The exchange Tradehill is an example business that attempted doing everything by the book, and got shut down.

It's not clear what legal status BitcoinOPX would garner, although we're inclined to predict going the "Tradehill route" if we started out fully transparent. For this reason, like the ownership (https://sealswithclubs.eu/faq/) of poker site SealsWithClubs.eu, we choose the protection of anonymity for now.

Believe me if scamming and theft were the goal it would be much easier to create an online wallet or bitcoin currency exchange with the intention of eventually disappearing.

@Goomboo - thanks for the great feedback. This is exactly the purpose of this thread.  :)

- The biggest reason to not offer a 1 BTC lot size is simplicity, not our trade fee. It's important to me to keep things from being too complex. Not everyone has the obvious depth of trading knowledge and experience you do. This exchange has to accommodate all types.

- regarding trade fees, Zecco trading became hugely successful by offering strictly online trading of stocks and options, which allowed them some of the lowest fees around. Their fee is $4.50 per trade and $.65 per contract.

https://www.zecco.com/explore/online-options-trading.aspx

- regarding mitigating counter-party risk, I agree largely and I'm considering dealing with the issue as you suggest.

It accommodates all types by not offering 1BTC lot?

You've got a bootstrapping problem. Few people are going to jump in first for a larger amount.

Hello again everyone!

I'm pleased to announce new changes.

First, we are switching to a formulaic, rather than fixed, escrow to back options. Details are on the updated How it Works (https://bitcoinopx.com/how-it-works) page. Here is an example showing benefits.

Escrow (calls) = (current price + price move potential of current price) - strike price x number of bitcoins

Bob creates a CALL 100 option with strike price $5.50 expiring in 1 week.

Escrow = ($5.25 + 15% of $5.25) - $5.50) x 100 = $54.00

So Bob must leave $54.00 in escrow to open this position at a 1 week term.

This model also takes volatility risk into account as time lengthens. Below is an example with the same values but at 24 weeks (6 months)

Escrow = ($5.25 + 70% of $5.25) - $5.50) x 100 = $343.00

Now Bob leaves $343.00 in escrow to open this position at a 24 week (6 month) term.

We find the volatility risk has drastically raised the amount of funds Bob needs to open this position at a 24 week (6 month) term. This leaves room for bitcoins to rise 70% in 6 months, which is feasible.

Another key change is the ability to now set View All (https://bitcoinopx.com/trade) on the option chain chart to see the full range of options.

_________________________________________________________________________

@FreeMoney: if you look at the math on a 1BTC lot you'll see it doesn't work very well. Let's use the values above but say Bob creates a CALL 1 option with strike price $5.50 expiring in 1 week. The current price is $5.25. Let's say the price jumps in one week .30 cents which could be normal these days.  Bob would pay the difference between strike $5.50 and price $5.55 which is $.05 multplied by 1 is still $.05. That amount doesn't make much sense to me, especially considering trade fees would make it negative.

If the price jumped $1.00 (not common these days) that would equal a $.75 payout before trade fees.

Thank you for being responsive to feedback - you have potential customers who are excited about your product as well.

I see another serious issue with your platform and that is liquidity.  Right now you offer what, 52 weeks of contracts?  That is 52 different products...do you realistically expect to have any trading interest for that many trading points?  The trend in derivatives is that the highest volume of transactions / deepest liquidity is in the shortest term contracts and the farther out you trade into the future, there is less and less of a market.  Also, why would someone care about trading week 40 or 45?  There is no fundamental significant difference here - no one realistically cares up to a certain point into the future.  If no one cares, no one trades; if no one trades no one cares...it's a vicious cycle.

Here's a solution:

Offer:
-Only two weekly options - this week and next week and continuously roll them into the future (aka when the prompt week expires, add a new option after the next week)

-An option through the end of this month

-An option through the end of this quarter

-An option through the end of this year

Some people may be like "well, I want to trade 10 years into the futures!"  You can solve this by having an OTC (over-the-counter) section of your website where people are allowed to create custom option deals seeking buyers / sellers.  This isn't essential, but it would make for very interesting interactions between customers - I vote that you create something like this after a few months of consistent interest in your site since it isn't that important.


---

Now about the contract size.  From what I see, it looks like you have the 100 and 1000 BTC contracts as entirely different markets.  What I mean by this is that if someone wants to sell a 1000 BTC option, 100 lot people can't come through and nibble off of the order.  This is a problem.  In the first paragraph, I pointed out that you have a serious issue in that in a single year you have 52 different markets.  If the different contract sizes can't trade together you now multiply this by two.  Even if Mt. Gox opened an option exchange, they couldn't populate 104 different markets.  You solve this by abolishing your contract size and make everything in increments of 1 BTC.  A smaller contract size with less terms to trade forces all of the trading interest into a few locations.  This boosts liquidity, customer interactions, etc.  These are positive factors which feed on themselves - the more trading, the more customers, the more customers, the more trading.

@Goomboo: thanks for the continued feedback.

- regarding 52 weeks of contracts I know what you mean. My belief is most of the option action will be within 4 weeks, and then maybe another smaller cluster around 24 weeks (6 months), and finally a few at the last outpost 52 weeks (1 year) away.

There will not likely be much action within other areas at the outset. However, as each week elapses options will likely fill in for every week of the year upon reaching that point. It will probably be helpful to add a scroll button to the option chain chart for this reason, but I don't see this being a problem.

I prefer weekly Maturity to bi-weekly, because with bitcoin things can change that fast.

- regarding traders trading different lot sizes they are certainly able to. There is nothing which prevents mixing of lot sizes. A trader can trade 100 lot sizes, then adjust the chart or field and trade 10, or 1000 BTC lot sizes at anytime.

- regarding dynamic lot size starting with 1 BTC I don't think that would work well, actually for the same reason you give about having 52 weeks. It's harder for the market to concentrate around any particular grouping. Traditionally, of course, an option represent 100 shares of a company. Can you imagine if the model were switched to allow dynamic sizing of underlying shares? How could traders find common ground or value on options for AAPL which could be 63 or possibly 1,022 underlying shares?

Awesome, I'm glad that the quantity scales with volatility and time exposure.  As to the percentage price changes - I think eventually a market-based approach would be best (that's how it works "in the real world" for the most widely-traded products).  Basically we can sit here and say "a 15% price move in a week is reasonable", but until we get our hands into the data, we are really just talking.  If we use arbitrary numbers to determine what we think is reasonable, we're bound to get blown out of the water or leave money on the table.

Here's what I would do:
-Calculate the historic volatility for the term of your contract and used a distribution based approach to determine what is reasonable

Here's how to tangibly do this for a 1-week contract:
-Pull the historic price change every week since the inception of BTC
-Get a table with the weekly percent changes in price since BTC began to be traded
-Take the average of the weekly price changes and the standard devation
-Add the average by 2 x the standard deviation of all of the price changes
-Whatever this number is represents the percent change to apply to a weekly contract
-This number that you get means that 95% of the time, the weekly price change will be less than this and it is a good number to use for your contract...or the flip-side: every 20 weeks, a price change will happen that is greater than this
-You need to repeat the above steps for whatever the term of the contract you are offering will be (aka for two months into the future, you need to pull prices for every two months and repeat the steps)

This is a lot of work, but it will get you a seriously mean product that is more robust.  It can also save you some money - what if the reasonable weekly price move is around 5%?  You're cutting your customer's capital - vital capital that could be employed in trading and generating you more commissions.

---
About your comment to FreeMoney regarding the commission - this is why you need a percentage-based commission (just like Mt. Gox).  Do you think Mt. Gox would get the same trading volume if they charged every trade a $4.95 commission?  You stated that you are basing this model off of Zecco - a retail stock brokerage.  Here's the reason they only offer 100 share options - anything smaller represents an odd-lot transaction in the stock market.  Bitcoin doesn't have these restrictions.  The most logical granularity for contracts at this moment is 1 BTC.

The (academic) valuation of an option tells you what you should pay for the right to own an option on a single share.  The 5 main component of valuing an option are:

-Strike price
-Current spot price of the security
-Historic volatility across the time of the contract
-Time of the contract
-You opportunity cost / what rate of return could I get if I didn't do this trade

None of these has anything to do with the actual quantity of shares you will be trading.  Here's why:

Traders find a common ground because they are able to know what the right to buy / sell  share should be worth about $.xx a share.  They then take this knowledge (or their intuition) of what the fair value of the option should be and THEN look at the market and see what quantity they can trade without exceeding their concept of fair value.

So basically you need (I hope you've done this already) a price latter (market depth - bitcoin.clarkmoody.com) at each strike price for both the puts and the calls so that the highest bid and lowest offer are shown for every contract.  ALSO we need to be able to see it so we can know how much we can trade before sweeping away all the liquidity.

No, that's not what I'm saying.  They are separate markets.  Someone who says "I will sell 1000 BTC at this price at this point in the future" isn't legally obligated to have a "partial fill".  An option is a legal contract (in the real world) and that is why your three quantities (10, 100, and 1000) are entirely different markets - there can be no interaction between the three.  In other words, if I see a put for 1000 BTC, I can't go and nibble 10 BTC off of his option so that now he is only offering 990 BTC.  That is violating the terms that he said he would accept!

This is why you really need ONLY a 1 BTC contract size.  "I will buy 1000 1 BTC puts at this price...".  If you don't make it this way, you have (3 x however many terms you are offering) markets that will be trading...I doubt there are that many active traders in the world of BTC :p

Look at the exponential decay in volume in the futures market:

http://online.wsj.com/mdc/public/page/2_3028.html?category=Energy&subcategory=Petroleum&contract=Natural%252520Gas%252520Comp.%252520-%252520nymex&catandsubcat=Energy%257CPetroleum&contractset=Natural%252520Gas%252520Comp.%252520-%252520nymex

It's the same in any market which has a forward curve (actionable prices in the future)...no one cares / has a reason to trade 13 periods from now and if they had a reason, they have less of one 14 months from now.

I agree with at MAX bi-weekly...this week up to next week and then only end of months there after.  As soon as this week rolls off, you add another week (after the new week that is starting).

@GoomBoo: regarding any attempt to calculate volatility of BTC/USD pricing I simply refer you to the monthly chart view on our home page:

https://bitcoinopx.com/?v=m

Take a look at that for a second. For the approximate 1 year from April 2011 to April 2012 bitcoin price was around $5 before exploding to almost $32 (500% increase!), and then lowering to around $15 (still about 200%), before settling back down around $5.

Now, I've been following bitcoin for quite a while, and that was no fluke. A good number of "bitcoiners" fully expect another explosive price jump in time, and 1 year away is not infeasible. The formula used takes this into account.

- regarding our trade fee, again, it's not the impediment to offering 1 BTC. Even ignoring any trade fee, do you really think it makes sense to open and close a trade with an expected return of $.05 cents? As for a comparison to Mt.Gox there is little comparison. They are a currency exchange, which is like a utility. On the other hand we offer both a financial product and service.

- regarding option pricing, yes, the highest bid and lowest ask are shown on the option chain chart.

Edit: regarding "nibbling" off an option, you are correct, it can't be done. This is similar to traditional options. One option contract for GOOGLE represents 100 shares of GOOG, and traders can't "nibble" 10 of those shares away. ;)

I need to return to this to say one more thing.  This is why you really need to change your bid / offer to a per BTC figure (that's how they do it over at Zecco [who is really just showing you the option tier that everyone else is seeing] too).  You always need to look at an option on a per unit basis - in other words, what value are they asking for the right on one unit.

Here, toy around with this and plug in AAPL's values:

http://www.numa.com/cgi-bin/numa/calc_op.pl

Notice at the bottom, it tells you the fair value to own the right of a single share.

@GoomBoo - regarding 1 BTC, again, there are two things which make it infeasible in my eyes. First, the resulting profit differential is too meager to garner any interest, and second the unlimited variations of lot size would make it hard if not impossible for the market to coalesce and determine value.

Right and what I'm telling you is that what you have represents a belief that prices will only move up or down 15% in a given week up to x% across a given timeframe.  If prices move 30% in a given week, your customers will be blown out of the water and you'll be getting some angry emails from holders of options.

What you have is good (a dynamic escrow quantity), but eventually (as your product matures), you can do better (by using a market-based approach).

I'm aware that I'm totally tearing into your product, but that's because I actually want to use it - check my posting history, this is the only thing that has drawn me onto these boards in 3 months.

Profit.  My whole point is that at 1 BTC contract size, I'll be trading 50 contracts and those 50 contracts won't be there if 50 smaller guys aren't allowed to play because they have to trade higher.  (Ignore the fact that you put in a 10 contract and look at my point).  By

Value.  Define value - what do you mean value?  The market will have LESS difficulty coming together because there will be MORE liquidity showing in the book.

And please don't misunderstand anything of what I'm saying as trying to be argumentative - I want you to have a strong product and this type of debate really helps iron out details that could potentially derail a new venture.

The likelihood of prices moving 15% versus 30% or even far more are factored into the formula. As shown in the example above as time lengthens volatility risk mandates much higher reserve placed in escrow. This can cover over a 130% price move in 1 year. If at any time the actual price move makes higher escrow necessary the option creator has 24 hours to add funds or the account is frozen and the option is settled immediately.

Well at least Goomboo's sugestions are out in the public, so when BitcoinOPX's competitor is designing it's system they can implement them all.

@BitcoinOPX

You would be very wise to take all of Goomboo's suggestions on-board... If there is one person on this forum to listen to, it is him.

His trading advice has been instrumental in teaching people how to not-loose money when the market was more volatile.  I blame a large amount of the stabilization of the Bitcoin's price on his thread:

https://bitcointalk.org/index.php?topic=60501.0

@GoomBoo - I can't "Ignore the fact that you put in a 10 contract" because the 10 lot size was put in.

- we will have to disagree on how the market may come together.

- I understand you are not trying to be argumentative. I'm very appreciative of your feedback.

Yep, it really makes logical sense - the greater the period of time, the greater likelihood of a certain percentage move.  It'll work better than an arbitrary $150 payout cap.

Settled immediately isn't an idea I had though about and it adds an interesting twist to your product - it turns a European style option into an American that is immediately exercised at a certain threshold.  Hmm, interesting idea, I'll have to think on that one...I kinda like it :p

By all means, use the 15% number.  I'd be aware though that put options should be capped at 100% (commodity prices do go negative, but not in BTC :P).  It make no sense for a put seller to hold $500 when the most they could lose is $400 (etc, you get the point).

My point that I am insistent on is that you should just look at your numbers.  Rather than saying 15% is reasonable, look at what the market actually did rather than imposing your opinion / intuition on it.  The absolute best thing you can do here is drop any notion of what you think is normal and dig into the data to find out the truth.  After learning the truth, apply it to your product so that YOU can make money from it!

The method I told you is almost identical to value-at-risk, which is used in almost every field of finance.  Rather than a risk manger saying "oh, I feel that he makes or loses a few thousand every day", he can say "every 20 days he makes or loses more than $x.xx".

@da2ce7: Many changes have come from @Gooboo's feedback. He is obviously an experienced and knowledgeable trader.

Lol thanks for the nice words but me saying a few things on a message board usually isn't enough to stop the market in its tracks :p ... I really just wanted people to stop losing their money :p

Alright, agree to disagree and I am very thankful for the changes you have made...this is the first serious attempt at a BTC option exchange I have seen and I'm genuinely excited about it.  I really do want you to succeed here. 

The second the BTC derivative scene really takes off, I'm going to be hammering the exchanges for deliverable contracts, contracts that can be moved from exchange to exchange (like BTC), and of course - exotics :p

@Goomboo: yes, put options are capped and don't go negative.

- regarding looking at the numbers, I have. I've looked at all the historical numbers. As mentioned, I've been around bitcoin for much of its history. The value is not some random intuition. It's based on reasonable expectation and what is probable acceptable risk.

I'm feeling a bit sassy and I mean no offense :p

http://lmgtfy.com/?q=define+intuition

You just described to me how you've looked at the numbers and have an idea of what they are...that equals intuition!  And the funny thing about humans and our intuition is that we're normally wrong.

I'm saying that you need to find the average to the 4th decimal place, find the standard deviation, multiply it by 2 and add it to the average so that I can be 95% certain that your number makes sense.  I have no idea what a standard deviation of returns is for 1 week, 1 month, 1 year, but I'm willing to take a trade that you don't either (yet).  If you want to be super-cool about it, do all the calculations on log-normal returns rather than standard returns (they account for a more true distribution of returns and are additive - but knowing that was extra credit in FINC 689 so not too important :P).

This has huge repercussions -> what if I enter a trade and my payout is only $150 when the TRUE and FAIR payout should have been $200 due to someone's concept of "this is normal"?  I've been shortchanged by someone who was unwilling to do the legwork to find out what that option should have required for margin.

Again, I'm sassy and harsh at times, but I really do wish your success.  This is something I learned at a place I once worked - when someone is smashing you about every single number you put forth, you learn your stuff pretty quick :p

Ding ding ding. The way options came to be was based on commodities where a standard contract for a certain amount of a certain quality commodity was to be delivered at a certain date in the future. Due to fabrication issues it would be possible to delivery different weights that were still within good delivery standards. For example, a '400oz GD London bar' might actually weigh 397.65oz or 404.22oz.

With BitCoin there is no divisibility issue imposed by physical law. Therefore, there is only a need for a 1BTC, .5BTC or even .1BTC (optimistic about the BTC price in USD!) contract and buyers or sellers can just increase their volumes.

Regarding counter-party risk, since it appears you do not want to be the market maker, you need to have this figured out or there will be a Bear Stearns, Lehman Brothers, JP Morgan and etc.

To start I would .1BTC contracts expiring weekly with 4 weeks out as the longest contracts. Have margin calls in place and only make a market when you can successfully close positions. Then allow longer terms as volume increases and you are able to successfully manage margin calls, margin requirements and collateral.

I think he's on to a good start with requiring customers to post collateral (hopefully based on market volatility).


Edit: To be honest that's the one thing that really caught my eye about this exchange - the fact that I:

1.  Can't sell options and then run away
2.  Will have a payment at the end of the day if I'm long an option

@Goomboo: this is where I ask if you're looking to be argumentative again ;)

I said I had looked at the numbers in response to you saying look at your numbers.


How do you define "fair"? What if I do what you suggest and when reality plays out the numbers are even further off? At some point traders have to take some share of responsibility themselves. The numbers are published, and if they are not comfortable with any mathematical outcome they are not forced to trade by anybody.

@sunnankar: yes, we have counter-party risk figured out. Traders must post and maintain sufficient collateral into escrow to open and maintain a position. It's all explained on our How it Works (https://bitcoinopx.com/how-it-works) page.

You're requiring your customers to post margin to cover a certain move in prices.  This move in prices that you have chosen is based on what you feel is appropriate.  I'm suggesting that you require your customers to post margin to cover a move in prices that actually mimics reality.  Which is more "fair" - requiring customers to post margin based on what you feel reasonably covers a move or what statistically covers a normal move?

That's just it, if you do what I suggest, you have a statistical measure that tells you historically that only 1 out of 20 periods of time they risk receiving a shortfall in earnings from the market moving more than expected.  That should cover you when you receive 500 emails from angry traders who only received a payment sufficient to cover a 15% price move when the market actually ended up moving 50%.

You will have huge weeks in which BTC blows up or collapses.  Which of these two defenses would you prefer to employ?

1.  I felt that those were appropriate ratios based on me looking at the numbers.

2.  The price move was a big event which is bound to happen, however with our current margin model, in the long run this should only happen 1 out of 20 time-series.  In other words, 95% of the time, you will get paid in full.

I define a fair model as something which neither favors the buyers nor sellers but as something which is objectively based on historical data.  If you base this on what you feel is appropriate, you will ultimately be unfair to the buyers (by giving them too many shortfalls in revenue) or the sellers (by requiring them to post too much margin).

I'm about to just let this go, but here's one more shot.

A 1BTC (or better, no min) lot size is not to make an expected return of 5 USD cents. It is to make some amount of bitcoins which many of us expect will be very valuable in the future.

Low minimums also allow users to get familiar with options and your site without large risk or a large amount of funds tied up.

Reducing to 1BTC min also enables 9BTC and 15BTC. I expect it will be quite some time before that amount of liquidity will not be of any use to you.

I just ran the numbers for the past 52 weeks.

-In a given week, there is a 32% chance that BTC can go up or down by 16% or more and a 5% chance that it can go up or down by 31% or more
-This means that 32 out of every 100 contracts on your site will receive a shortfall in payout (in the long run)
-If you were to require a 31% margin requirement, only 5 out of every 100 contract on your site would receive a shortfall (in the long run)

The above shortfall numbers are based on a 16% price move across a 1 week exposure - you are using a 15% weekly threshold, which actually means that you stand an even greater chance of facing shortfalls.

See how brutally unfair it is to only allow the buyers of options to receive a 15% price move payout?  Yeah sure it scales with time to maturity, but enough to cover the decimating volatility of this market?

Earlier you mentioned value and how you are worried about not allowing traders to find value - that is not the job of an exchange.  Your job is to facilitate trade.  The main task of an exchange is to get out of the way and allow the market participants to determine what fair value is.  If your exchange has rules which are not based on market data, it inhibits an otherwise healthy balance of buyers and sellers.

Notice how every single thing I have been hammering you about has been something which would inhibit trade?  (Market hours, contract size, revenue shortfall, arbitrary price thresholds)

---
Just to see that these numbers aren't an abnormality, I ran the numbers since the inception of BTC.
-In a given week, there is a 32% chance that BTC can go up or down by 18% or more and a 5% chance that it can go up or down by 38% or more

What about a bi-weekly, or even a monthly contract?
-In a given month, there is a 32% chance that BTC can go up or down by 43% and a 5% chance that it can go up or down by 87%
---

@OPX
I know we agreed to agree to disagree, but really this is another arbitrary limitation that not only divides the market into however many contract sizes you have, but also limits free trade.

You are an exchange that limits trade...you're violating your definition / shooting yourself in the foot...and I'm not the only one pointing it out.

"But what about my commission"
-Make it based on the notional value of a trade (if you go back and look at my earlier posts, I didn't point it out, but you end up making more money that way - you offer the ability for people to gain leveraged price exposure to BTC at a fraction of the cost of Mt. Gox)

Frankly, I suggest you don't open on Monday but work with your customer base to make something awesome.

Thanks everyone for all the great feedback!

I'll be off the board today getting everything ready for launch. Remaining feedback will be taken into consideration but I won't have time to reply.

I hope everyone will give us a look and a try tomorrow!  :)

Update: We are now open (https://bitcoinopx.com)!

A big thank you to everyone who helped us during Beta testing. Feedback resulted in exciting changes including 24 hour 7 day trading, and formula based escrow requirements to back options. Please see our updated How it Works (https://bitcoinopx.com/how-it-works) page for details.

Congratulations to winner Ichthyo, who sent in the most useful bug information. Ichthyo will be sent a 10 BTC prize. Please post your wallet address or reply to the PM I'll send you  :)

Happy trading everyone!

what a nice surprise  ;D

Anyway, let's take the opportunity to thank all the people involded in the creation of BitcoinOPX.
For sure this is a valuable addition to the world of Bitcoin. Featuring a nice mix of a well known proven finnancial instrument made available in a novel and interesting flavour. Special thanks for this public beta, and for listening to your prospective users and working in several proposals and improvements so quickly.

-- Ichthyo

Is your site working? I don't see any quotes for options

Yes, the site is working, but lacking activity for now. Bitcoin is a niche community and people readily comfortable with jumping in and trading complex options to their advantage seems limited.

However, we're now working on establishing BTC <-> USD currency exchange using MoneyPaks which may help with traffic. That might spill over into options trading too. We're ready to grow as the Bitcoin economy grows.

i didn't know about this site till today

I'm trying to wrap my head around it, trying to figure out how to go long / short

maybe you could expand the How it Works section and really dumb it down  ( like what is strike price? )

give me an example of a bullish & bearish option

I just heard of this now when this post came back to top.

I had a look thru several "Trade" screens but couldn't find any options to trade.

Maybe, it would be useful to have a "ShowAllOpen" button that doesn't show just one strike date/contract size/type but lists any and all options that are actually out there. This may help with people finding something they can trade.

I was thinking about loading funds to create some options but past Bitcoin trading sites have had such a poor track record of keeping customer funds safe that I really feel it would be yet another risky venture.

Options trading can get very complex, though I doubt the opportunity for that yet with bitcoins. There are several primers on the net via google but I'll give a few examples here to help out (pulled from my memory as it's been years since I did any option trading on CBOE).

If you're bullish on Bitcoin you might buy a CALL option. This gives you the right to buy at a certain price ("strike price"). So if you think it'll be higher next week/month/year you buy a CALL at a price favorable to you, like todays price. Later when it matures you can lock in the price and buy them at the strike price. Your profit being the difference between market (on that date) and strike prices.

If you're bearish you might create and sell that CALL above and hope to profit when the price is below strike as the option holder will not be able to exercise it and hence your sell premium is profit.

Or, also if bearish you might buy a PUT option. That gives you the right to sell at a certain "strike" price. So if you think BTC next week/month/year will be lower then you'd buy a PUT allowing you to sell your BTC at the todays (or whatever available contract) price (even though the market price has gone lower).

Likewise, if you're bullish you may want to create and sell PUT contracts into the market hoping they'll all expire worthless when the market price rises.

In real life options are often used as only part of more complex trades. For example, someone opening a new trading exchange needs to seed his wallet with 10000 bitcoin but he doesn't want to take on the risk that bitcoin may drop over the next 6 months. So he buys/sells option contracts to protect that position. If the price of bitcoin over the next 6 months varies drastically he can balance his loss with a profit in the option contracts. Options like this are used as insurance.

Many more ways to use them exist but these are some basic ones. And of course the option market needs to have some real liquidity to be useful in real life.

thank you, this really helps


Well, at least the owner of this site acknowledges the need for top security
I'm going to throw in a few bitcoins later, and sell a CALL, to protect myself from bitcoin going down

but say i sell a : CALL - 1 BTC - strike price 10 - next week
and price at the end of the week is 11$
do i owe the buyer of the option 1$ or 0.1BTC ?

You're giving the buyer the right to buy that 1 BTC for $10 next week. IF the price next week is $11 then I believe the OPX settlement process would take $1 from your escrow holding and credit the buyers account, and the option expires. From my reading of the site info it doesn't actually exercise the options but calculates what the price difference would be and makes the adjustment.

Of course, you sold the option for some price so your loss would be $1 minus how much you sold the option for.

Pricing options is pretty tricky stuff and from what I recall there are pricing calculators online that can take into account volatility and estimate what an option should cost. They use The Black-Scholes (http://en.wikipedia.org/wiki/Black%E2%80%93Scholes) equation which may not always be appropriate. For Bitcoin the volatility must be pretty high so I would expect options to be quite expensive. ie. The person who buys your CALL option should have to pay quite a bit for it as there's a fairly high chance that it will payout.

The higher the price goes next week the more you lose. Either way you keep the premium (what you sold the CALL for).

---- edit added later ---

A Black-Scholes calculator may help with setting an option price but you need an estimate of volatility to be able to use one. According to the wikipedia a quick (not so accurate) way is to make note of the prices changes over recent days and multiply that out to a full year (as the equations take annualized values). So if BTC has been moving about $.50 each day then 0.5/8.5 is about 5.8%. (Since there are 365 trading days for bitcoin (not 252 like CBOE), I guess the multiplier would be 19 not 16). So a rough estimate for recent BTC is 19*5.8% = 110%

When I place that into the "Trading Today (http://www.tradingtoday.com/black-scholes)" calculator I get a CALL price of $0.11 and a PUT price of $1.54 (strike $10, underlying $8.56, 7 days, 110% vol., 3% int.)

cool thank you, its starting to make sense... i think

I guess i could profit by, buying a bitcoin @ 8.50 and selling a CALL with a strict price of 9$

that way if the bitcoin price shoots up, so dose the value of the bitcoin i bought, so my loss in managed
and if the bitcoin price drops, at least i make some profit on my CALL

Whether that's a good trade depends on what you can sell the CALL for. In essence you're limiting your upside profit on the BTC in exchange for getting the CALL premium. If you believe BTC has a modest/weak upward trajectory then that's likely a decent "bonus" on just holding the BTC. But it doesn't limit your loss. Remember a CALL is the right to buy but does not imply "must buy". If BTC prices drops below $9 the CALL expires worthless but you still lose if BTC price drops below your buy in price (minus the premium you made too).

(Someone who is highly bullish on BTC would buy your CALL hoping that BTC price rockets to much more than $9 because this allows them to buy in with much less capital, ie. leverage). For the price of the CALL he gets all the upside from $9 up to whatever price it hits.

A more typical stance is to limit your downside (loss) on your BTC holdings. So say you buy 1 BTC at 8.50 and then buy a PUT at $8. This way no matter how low BTC goes you can still get $8 for yours and limit your loss. ie. you HEDGE your BTC position. In this position you aren't limiting your upside so if BTC takes off you will still fully benefit.

The problem, of course, is that you likely cannot buy that PUT in the market. There is practically zero open interest anywhere. Which is a shame as options could be very useful for bitcoiners if they'd learn how to use them and get into it.

Why you are not market making?

IMO: There are too many choices for the average user. Have a featured set of options each month with free trading for traders to see the potential it could add to their bitcoin portfolio.

Example: Offer the Aug 31 $8 call option on 1 BTC for free. Have writers put up 1 BTC as collateral and collect a small premium.

Is there an API for market makers?

@adamstgBit: that's a good idea. We'll look at adding a better overview of trading options. :)
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@BkkCoins: Adding a "Show All Open" button for options is a great idea, and we'll add it, thanks! :)

Regarding keeping customer funds safe we're aware of the poor track record due to hacking. For this reason we don't store any funds on the site at all. Even if our site is completely compromised no funds could be moved. Also, every withdrawal is approved manually, and we require email confirmation beforehand.

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@adamstgBit: you would owe $1.00 in that situation, the difference between the contract strike price and actual price at maturity. If you owned the bitcoin as the option writer you could sell it on Mt.Gox at the final price to cover how much you owed. That's known as "writing a covered call". @BkkCoins is correct that we exercise options as contracts for difference which has the advantage that traders don't have to own the underlying asset. This is how we'e able to allow options trading currently on gold, silver, oil, and stock prices as well as bitcoins. :)

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@JeanSergeBaptise: regarding our anonymity please see here:

https://bitcointalk.org/index.php?topic=84092.msg935881#msg935881

We've been running almost 2 months now with no issues, and will continue working to build trust. Of course, please feel free to only use amounts you are comfortable with.

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@Andrew Vorobyov: we might do that, but for now we're still focused on getting a good trading experience set up.

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@TTBit: I think you're right about having too many choices for now. We wanted to build out a robust trading platform, but it may be better to scale things back to be very simple, with limited featured options like you suggest, to start off. Thanks! :)

We don't have any plans at this time to add an API for market makers.