Last few days to catch April as an MPOE Bondholder.

[MPOE-PR]

From the original MPOE opening to the public announcement:

MPOE holds absolutely no capital of its own, being exclusively composed of the algorithm that prices options and other algorithms and general craftiness required for the entire thing to function. During its normal operation, MPOE borrows capital needed for complete coverage of all risks it undertakes (by which we mean an amount of BTC equal to the total number of open CALLs plus a quantity of USD equal to the sum of all puts multiplied by their respective strikes. Based on this reserve, MPOE can never end up unable to deliver BTC it owes, regardless of whether the BTC price reaches infinity or zero).

At that time (February 20th) Mircea Popescu was (by virtue of inertia mostly) the only lender of MPOE, on the basis of the following agreement: for a 2% premium on any capital lent (calculated as above), he'd cover any losses that may arise.

This deal has been since then open to anyone! In order to finance MPOE, interested parties have to send an email which will mandatorily contain: a) the bitcoin address where you will receive your capital back when it's time plus your monthly premium, b) the exact value of your desired premium (a real number higher than 0 and lower than 2), and c) the exact amount you will be investing. After sending the email, send the money over at the usual bitcoin address (1JPvucRfu3ZzEvfBUQTJwsxMrZjeTqD6zR). Make sure that the 6th, 7th and 8th decimals are all 8 (so in order to invest 1000 BTC send 1000.00000888).

At the end of each month, the list of deposited investments will be ordered ascendingly by the premium, and a line drawn under (or through) the offer which fills the capital needs of the respective month. All the people above the line will receive the last accepted premium (a system much like the one used for treasury bonds sales). So as to understand better, an example:

A sends 100 BTC desiring a 1.2% premium,
B sends 1`000 BTC desiring a 1.5 premium,
C sends 500 BTC desiring a 1.65 premium,
D sends 5`000 BTC desiring a 1.9 premium.

Were this to happen in October 2011, when the total financing needs were 1152.17 BTC, the line would be drawn through C, and the month's financiers would be:

A, with 100 BTC at 1.65%,
B, with 1000 BTC at 1.65%, and
C, with 52.17 BTC at 1.65%.

Were the same to happen in December 2011, when the financing needs were 5775.71 BTC, the line would be drawn through D, and the month's financiers would be:

A, with 100 BTC at 1.9%,
B, with 1000 BTC at 1.9%,
C, with 500 BTC at 1.9%, and
D, with 4175.71 BTC at 1.9%.

Obviously, in all cases when the financiers do not cover the month's needs, Mircea Popescu will fill in the remainder at the fixed rate of 2%.

Although the financiers do not receive any part of profits made by MPOE, their financing is not without risk, because their capital will be used to answer any shortfalls, proportionally. Taking as an example again the month of December 2011, when the net results were -112.556858450 BTC, this sum would then have been divided by the total capital (5775.71) resulting in a loss of 1.9487969% (1.9487969 bitcoin cents to the bitcoin). This means that going into January 2012, the capital of each would be as follows:

A holds 98.051203100 BTC desiring a 1.2% premium,
B holds 980.51203100 BTC desiring a 1.5% premium,
C holds 490.256015500 BTC desiring a 1.65% premium,
D holds 4918.623892967 BTC desiring a 1.9% premium.

Thus each financier lost a small amount of BTC; A 0.049 BTC, B 0.49BTC etc. In October, when MPOE made a profit, each financier would have simply received his due premium, without any capital losses.

It is important to bear in mind that any sums sent for participating in financing will only be considered for whole months (so if you send on the 2nd or 20th of March 2012, you will not be eligible to participate in the financing of March; only April and onwards). The owners can request the withdrawal of their investments (by sending an email from the same address as the one that announced their deposit), which will be processed at the end of the month, and only after any relevant losses (if applicable) have been deducted. Investments under 50 BTC are not accepted due to clerical reasons. Any bonds depreciated below this level will be automatically returned to the respective investors.

The list of sums invested and the corresponding premiums will be available on a special page, as public information.

As the last Friday (the 30th) of March draws near, the window to send funds for the month of April narrows. After the 30th your deposits can only be used for May and onwards, so take advantage.

The capital retained from 3rd parties for the month of March is 3350.00005328 BTC from 6 bondholders. Using a best guess estimate the capital retained for April will be in the 3k to 5k BTC range.

[Stephen Gornick]

At the end of each month, the list of deposited investments will be ordered ascendingly by the premium, and a line drawn under (or through) the offer which fills the capital needs of the respective month.

Options with an April expiry are still opened throughout April.  So how, by March 30th, is the amount of needs for April known?  Or is it an estimate, and then exposure only up to that amount already secured are then sold?

[Stephen Gornick]

After the 30th your deposits can only be used for May and onwards, so take advantage.

I'm really struggling to follow some of the basics, apparently.

First, lets start with the calendar. The options month April 2012 began Friday, March 30th, correct?

Does this funding method described here follow a calendar month or does it correspond to the dates for these "options" months (e.g., April 2012 options month runs Friday March 30th through the end of Thursday April 26th.)  If it is a calendar month then Friday the 30th is not the last day of the calendar month, so I'm confused.

So then next, I am trying to figure out the relevance of the amount.

Using a best guess estimate the capital retained for April will be in the 3k to 5k BTC range.

Right now, a few hours into the April options month (thus probably close to the actual number that occurred at exactly midnight, GMT) I see:

April 2012



STRIKE | CALL BID   | CALL ASK   | OPEN
4.5    | 0.71264471 | 1.39455099 | 1493
5.0    | 0.49614665 | 1.02402041 |  300



STRIKE | PUT BID    | PUT ASK    | OPEN
4.5    | 0.52864471 | 0.90797308 |-1000
5.0    | 0.76348382 | 1.34118064 |    2
6.5    | 1.66619466 | 2.77230290 |  100


Then for May 2012 there is:

STRIKE | CALL BID   | CALL ASK   | OPEN
4.5    | 1.10729302 | 1.89189439 |   99
5.0    | 0.87283031 | 1.62887959 | -200
5.5    | 0.61814219 | 1.43481613 | -300


So, I'm wondering is it from these numbers that you determine your capital needs for April?   Do you then estimate?  If so, then does that estimate limit how many options you can offer (to where the buying and selling of CALLs and PUTs aren't cancelling most of each other out) throughout the the April options month?

Or am I missing something completely obvious?

[MPOE-PR]

Options with an April expiry are still opened throughout April.  So how, by March 30th, is the amount of needs for April known?

It's not, it will be known on the end of April. Here's how reserves are calculated (from the 1st post above):

MPOE borrows capital needed for complete coverage of all risks it undertakes, by which we mean an amount of BTC equal to the total number of open CALLs plus a quantity of USD equal to the sum of all puts multiplied by their respective strikes.

So, to understand this: at the end of today (Friday, March the 30th) all calls sold during the entire month will be added up, then all puts times their strikes added up then divided by the lowest btc price of the month, and the sum of these two is the reserve amount for March.

Does this funding method described here follow a calendar month or does it correspond to the dates for these "options" months (e.g., April 2012 options month runs Friday March 30th through the end of Thursday April 26th.)

The latter. A "month" for MPOE starts at the end of the last Friday of one month and ends on the end of the last Friday of the next month.

Right now, a few hours into the April options month

Actually April has not started yet.

I see:

April 2012STRIKE   CALL BID   CALL ASK   OPEN
4.5     0.71264471      1.39455099      1493
5.0     0.49614665     1.02402041      300

You must have caught the script just as it was updating the holdings. Those are in fact March options, not April. This might be a little confusing, granted, if you just happen to see the list for the first time in the wee hours of the last Friday.

What happened there is this: options can not be traded anymore on the last 24 hours of their lives (so during the last Friday of the month). There is however a slight delay between the moment when the month names are updated (~ a second past midnight) and when the volumes are moved around. Thus there's this (short) interval where you see the March options called April options. They're not.

Or am I missing something completely obvious?

You are possibly missing this part from the original post:

Obviously, in all cases when the financiers do not cover the month's needs, Mircea Popescu will fill in the remainder at the fixed rate of 2%.

Now let's go a little through some cases to understand this better.

Month 1. There are no bonds. MPOE sells 500 CALLs, no PUTs.
Month ends. Reserves = 500 BTC. Interest paid = 500 x .02 = 10 BTC.

Month 2. There's one bond, 500 BTC @ 1.5% interest. MPOE sells 500 CALLs, 500 PUTs @ 5.0, lowest BTC/USD of the month is 4.5.
Month ends. Reserves = 500 BTC + 500 * 5 / 4.5 = 1055.55555555 BTC. Interest paid = 1055.55555555 x 0.02 = 21.11111111

Month 3. There's one bond, 5000 BTC @ 1.7% interest. MPOE sells 900 CALLs.
Month ends. Reserves = 900 BTC. Interest paid = 900 x 0.017 = 15.3 BTC.

You can also give a look at February's closing to get maybe a better idea of how all this works in practice.

Don't hesitate to ask if it's still not clear in any points.

[Stephen Gornick]

Month 3. There's one bond, 5000 BTC @ 1.7% interest. MPOE sells 900 CALLs.
Month ends. Reserves = 900 BTC. Interest paid = 900 x 0.017 = 15.3 BTC.

I think that gives the answer that I was looking for.

So by the first day of month 3 exactly 5,000 BTC at 1.7% was committed for use for month 3's reserves, but by the end of that, only 900 was actually needed.  The remaining 4,100 BTC were not used and thus received no interest.  I'm presuming interest is paid evenly to all who lent their 5,000 BTC then .. so the actual return for each BTC lent was not 1.7% but 0.306%, in this instance?

[MPOE-PR]

That would be correct. This is why we try to offer a guesstimate of next month's needs, as in

Using a best guess estimate the capital retained for April will be in the 3k to 5k BTC range.

Obviously it's not exact, but it should give users at least a broad idea of what is going on.