Where wasn't he talking of the price of BTC? In the place where he says "price of BTC"?

 
I think this is a gross overstatement. MPOE holds > 3k bitcoins in bonds this month, for instance. Unless the pirate holds > 50k or something the market will not be "destroyed", just some lenders will have learned the diversification lesson the hard way.

The price of the BTC didn't swing wildly with the linode hacks, so unless the pirate holds significantly over 50k it won't touch the price. Not to mention options dampen swings to begin with.

There is no "Bitcoin Police". Jesus.

Are you people from like, the future?

This is possibly the most retarded thing I read on this forum. And just for the record, there is a lot of retarded shit here.

MtGox handles ~80% of all exchange trade. When people buy bitcoins on OTC or in person or so forth that doesn't show up as exchange trade. When people buy bitcoins by renting equipment from miners that doesn't show up as exchange trade. These two markets are each larger than the exchange trade, so MtGox handles maybe 20 to 35% of "traded bitcoins", and this mostly because trading bitcoins for actual items is rare and low ticket yet. Somebody was offering to sell a house for bitcoins, and so this third market is probably going to baloon larger than MtGox's in the near future.

In short no, MtGox is not nearly as important as it makes itself out to be, nor does it have much of a future at the current rate of misbehaviour.

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

Nice going!

Good to know. Is the two item list exhaustive?

Not exactly "any", as in, eleventy trillion, but at any rate a good approximation of "any".

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

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

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

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

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


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

Let us take some examples of the contract being exercised:

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

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

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


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

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

Let us take some examples of the contract being exercised:

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

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

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

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

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

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

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

guruvan, I think you are missing a key aspect of how MPOE works. If you were to go there right now, click on the ASK of say CALL @5.0, it'd spit out a page asking you how many contracts would you like to buy. If you type in say 1000 it'd say


You send your email, then send over the 76.30148110BTC and that's it, you now have 1k CALL @5.0 contracts.
Again, what's the open interest interest you for?

There's significant volume available for the quoted asks/bids. Have you had a transaction refused or how exactly does a perceived lack of activity impact you?


It's unlikely that MPOE will ever offer naked options.

I'm with him.

sgornick beat me to it, but yes, options work that way.

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

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

What can you do ?

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

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

Fast forward to your April paycheck:

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

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

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

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

Fast forward to your May paycheck:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I don't have either tainted money or MS, but if you'd stop beating your wife for five minutes you'd notice MS also uses their customer's resources to promote their boneheaded take on politics.

This is ridiculous. MtGox is turning into Microsoft.

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

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


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

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

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

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


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


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

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

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

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

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


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

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

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

How come no trades show on glbse since the 13th?