Purchased a 10,000 BTC PUT option today, history has been made

[Snail2]

Yeah, can someone please explain to me how this put options thing works?
I have never heard of it before, then again I am not a gambler 

Here's a good one with an example:
http://www.investopedia.com/terms/p/putoption.asp

...and an other more generic but still useful one:
http://en.wikipedia.org/wiki/Put_option

[1714990046]

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[louise123]

Yeah, can someone please explain to me how this put options thing works?
I have never heard of it before, then again I am not a gambler 

Here's a good one with an example:
http://www.investopedia.com/terms/p/putoption.asp

...and an other more generic but still useful one:
http://en.wikipedia.org/wiki/Put_option

So if I understand correctly:
Seller, says he will lock the price of his shares at $25 each.
Buyer, speculates that in 3 months time, the price of each share will drop below $25.
So he gets one of these put options for 1K shares for the period of 3 months.

So if in 3 months time the price of each share is $19.
The buyer then has the right so sell those 1K shares for $25 and make a profit of $6 per share.

(am I correct so far?)

If in 3 months time  the price of each share is $28 - then what? I didn't get it.
What does the buyer pay?

[Bit_Happy]

Yeah, can someone please explain to me how this put options thing works?
I have never heard of it before, then again I am not a gambler  

Here's a good one with an example:
http://www.investopedia.com/terms/p/putoption.asp

...and an other more generic but still useful one:
http://en.wikipedia.org/wiki/Put_option

So if I understand correctly:
Seller, says he will lock the price of his shares at $25 each.
Buyer, speculates that in 3 months time, the price of each share will drop below $25.
So he gets one of these put options for 1K shares for the period of 3 months.

So if in 3 months time the price of each share is $19.
The buyer then has the right so sell those 1K shares for $25 and make a profit of $6 per share.

(am I correct so far?)

If in 3 months time  the price of each share is $28 - then what? I didn't get it.
What does the buyer pay?

The buyer losses the premium (cost) he paid for the option. Option sellers take a greater (potential) risk, but buyers tend to lose long-term. FYI: You might want to learn call options first because they are a bit more 'intuitive', since the buyer is expecting prices to rise and the call option seller is expecting prices to fall.*
*...and/or hedging the risk on something they own, looking for a longer-term price rise.

[oblox]

Not sure who would take the risk of writing that many put contracts at what I would consider pretty close to ATM (huge counterparty risk here that it doesn't get honored). Having said that, those saying he needs luck need to realize BTC is still in a downtrend, evident by the resistance trendline on a log scale that has yet to be breached (easily drawn on a weekly chart on nearly all exchanges). Below $290-315 depending on exchange, the trend is your friend and it's down. It's reality until it isn't.

EDIT: Even black-scholes puts the option price at about $8.50 given current volatility (which happens to be on the lower end).

[Keyser Soze]

Not sure who would take the risk of writing that many put contracts at what I would consider pretty close to ATM (huge counterparty risk here that it doesn't get honored). Having said that, those saying he needs luck need to realize BTC is still in a downtrend, evident by the resistance trendline on a log scale that has yet to be breached (easily drawn on a weekly chart on nearly all exchanges). Below $290-315 depending on exchange, the trend is your friend and it's down. It's reality until it isn't.

EDIT: Even black-scholes puts the option price at about $8.50 given current volatility (which happens to be on the lower end).

MP (owner of MPEX) has been involved in large options deals previously, some of which have been very profitable or costly. That said, there's no way I believe this deal was made without seeing the relevant logs and transaction id.

[chriswen]

Not sure who would take the risk of writing that many put contracts at what I would consider pretty close to ATM (huge counterparty risk here that it doesn't get honored). Having said that, those saying he needs luck need to realize BTC is still in a downtrend, evident by the resistance trendline on a log scale that has yet to be breached (easily drawn on a weekly chart on nearly all exchanges). Below $290-315 depending on exchange, the trend is your friend and it's down. It's reality until it isn't.

EDIT: Even black-scholes puts the option price at about $8.50 given current volatility (which happens to be on the lower end).

So OP got a good deal?

[QuestionAuthority]

The dumbass bought it. Time to grab his money and get outa here.

[chriswen]

Not sure who would take the risk of writing that many put contracts at what I would consider pretty close to ATM (huge counterparty risk here that it doesn't get honored). Having said that, those saying he needs luck need to realize BTC is still in a downtrend, evident by the resistance trendline on a log scale that has yet to be breached (easily drawn on a weekly chart on nearly all exchanges). Below $290-315 depending on exchange, the trend is your friend and it's down. It's reality until it isn't.

EDIT: Even black-scholes puts the option price at about $8.50 given current volatility (which happens to be on the lower end).

Also I'm not really sure you can calculate it like that.  Options aren't just based on current volatility.  Instead you should look at the premium and see what is the implied volatility from that.  You're trading volatility, future volatility.

[arivar]

Not sure who would take the risk of writing that many put contracts at what I would consider pretty close to ATM (huge counterparty risk here that it doesn't get honored). Having said that, those saying he needs luck need to realize BTC is still in a downtrend, evident by the resistance trendline on a log scale that has yet to be breached (easily drawn on a weekly chart on nearly all exchanges). Below $290-315 depending on exchange, the trend is your friend and it's down. It's reality until it isn't.

EDIT: Even black-scholes puts the option price at about $8.50 given current volatility (which happens to be on the lower end).

Black scholes needs an annual implied volatility of 33% to valuate this put at $8.50. I highly doubt this is the case for btc options market.

[oblox]

Not sure who would take the risk of writing that many put contracts at what I would consider pretty close to ATM (huge counterparty risk here that it doesn't get honored). Having said that, those saying he needs luck need to realize BTC is still in a downtrend, evident by the resistance trendline on a log scale that has yet to be breached (easily drawn on a weekly chart on nearly all exchanges). Below $290-315 depending on exchange, the trend is your friend and it's down. It's reality until it isn't.

EDIT: Even black-scholes puts the option price at about $8.50 given current volatility (which happens to be on the lower end).

Also I'm not really sure you can calculate it like that.  Options aren't just based on current volatility.  Instead you should look at the premium and see what is the implied volatility from that.  You're trading volatility, future volatility.

The variables are all there to price a hypothetical contract value given there really is no secondary market.

[oblox]

Not sure who would take the risk of writing that many put contracts at what I would consider pretty close to ATM (huge counterparty risk here that it doesn't get honored). Having said that, those saying he needs luck need to realize BTC is still in a downtrend, evident by the resistance trendline on a log scale that has yet to be breached (easily drawn on a weekly chart on nearly all exchanges). Below $290-315 depending on exchange, the trend is your friend and it's down. It's reality until it isn't.

EDIT: Even black-scholes puts the option price at about $8.50 given current volatility (which happens to be on the lower end).

Black scholes needs an annual implied volatility of 33% to valuate this put at $8.50. I highly doubt this is the case for btc options market.

I used the volatility index as a proxy: https://btcvol.info/

Granted, this is a rolling 30 day value so scale appropriately for annualized. I would say the implied vol is pretty accurate given historic swings even though we're at historically low levels of volatility.

[dogtor]

>MPEX's owner
>great deal


Impossible. Mircea Popescu is a scammer. It takes only a few minutes of googling to find this out.

[chriswen]

Yeah, can someone please explain to me how this put options thing works?
I have never heard of it before, then again I am not a gambler  

Here's a good one with an example:
http://www.investopedia.com/terms/p/putoption.asp

...and an other more generic but still useful one:
http://en.wikipedia.org/wiki/Put_option

So if I understand correctly:
Seller, says he will lock the price of his shares at $25 each.
Buyer, speculates that in 3 months time, the price of each share will drop below $25.
So he gets one of these put options for 1K shares for the period of 3 months.

So if in 3 months time the price of each share is $19.
The buyer then has the right so sell those 1K shares for $25 and make a profit of $6 per share.

(am I correct so far?)

If in 3 months time  the price of each share is $28 - then what? I didn't get it.
What does the buyer pay?

The buyer losses the premium (cost) he paid for the option. Option sellers take a greater (potential) risk, but buyers tend to lose long-term. FYI: You might want to learn call options first because they are a bit more 'intuitive', since the buyer is expecting prices to rise and the call option seller is expecting prices to fall.*
*...and/or hedging the risk on something they own, looking for a longer-term price rise.

Very nice point  with the hedging.  To elaborate,

the call option seller can use delta hedging so that they can have a properly hedged bet.  But you lose money from delta hedging.  If an asset is volatile you'll lose more money from delta hedging.  If an asset is less volatile the option writer will make money.  This means that an option writer is actually short volatility.  They make more money if the asset is less volatile then the premium.

In the same way the option buyer could delta hedge and they'd make money if Bitcoin is more volatile then the implied volatility built into the contract.

Options are really interesting stuff.  I'm excited for the growth of options clearinghouses rather than just the OTC deals we've been seing.

[Mt. Gox]

Not sure why so many people think OP actually bought 10,000 BTC. He clearly said in his original post that the option cost him $7.50 per BTC. 7.5*10,000 = $75,000.

I don't think it's a stupid move. Looking at the Bitcoin price charts, the trend has been going downwards ever since late 2013. Is it really that unrealistic to think that it won't continue declining for another couple of months?

I wonder what would happen if the coin price moves in the other direction. I'm sure you have all the plans put in place in case the result did not turn out as what you expected? By the way, just wondering where did you manage to secure that amount of funding? Kind of curious since that is not small amount by any means.

You're probably thinking of shorting, which is a different thing. An option is essentially a bet that Bitcoin will/won't be above/below a certain price on/by a certain date.

I don't get how this works. How can he acquire 10000 for 75$? Where is the business for the one offering the BTC for such price? I guess im missing the point here.

He didn't acquire 10,000 BTC. Here's a short explanation of put options:

If you are betting against bitcoins, what you want to do is buy a put option, which is a derivative contract that allows you to sell something at a set price. If the actual price of the thing falls below the set price, or strike price, you make money.

It cost $75,000 for OP to buy a put contract to sell 10,000 BTC at a strike price of $215 per bitcoin. The contract expires in three months and will expire worthless if the price of a bitcoin is above $215 at that point. But the value of the contract will go up before then as long as the value of a bitcoin drops.

If the price of BTC is $207.50 then OP could sell 10,000 BTC for $215 making 7.50*10,000 = $75,000. Since the contract cost $75,000, he would be neutral overall.

If the price of BTC is $200 then OP could sell 10,000 BTC for $215 making 15*10,000 = $150,000. Since the contract cost $75,000, he would have made a $75,000 profit, and so on. The lower the price of Bitcoin is, the more OP benefits.

Wait, I am confused.
So, this is like a guessing game?
He placed a bet, estimating that the price of Bitcoin will be under $215, and if it is he wins, if it's not he loses.
Is that right?

That's a very simple way of looking at it but yes, in essence you are correct.

He paid $75,000 for the right to sell 10,000 bitcoins at $215 per bitcoin in three months. For example, if the price is $200 in three months then he will be able to make 15*10,000 = $150,000. Take away the $75,000 he spent to make the contract and he ends up $75,000 in profit.

Obviously the more the price goes down, the more OP profits. If the price happens to be $207.50 then OP's situation remains neutral. If it happens to be any higher than that then OP would have lost money (up to a maximum of the $75,000 he spent initially).

EDIT: In my explanation you quoted, I probably should have used "for $215 per bitcoin" than "for $215". My mistake.