Options

[markm]

I have been trying to figure out for a long long time now a generic way of doing options, that is a way that can be applied to basically any pair of assets, such as devcoins and bitcoins, or devcoins and litecoins, or litecoins and bitcoins and such.

I do not want to use an 'oracle' since oracles can be manipulated, so that basically means I have to do real options, not bucket-shop or pretend options where the assets never actually get exchanged.

That in turn means in order to sell someone the option to buy something, the something they can optionally buy must be in stock ready for them to buy it if they do end up exercising the option.

Since there is a limit to how much stock I have of any particular asset at any particular moment, I figure it makes sense to start out by offering call options on the thing I have in stock; that of course is pretty much the same thing as offering put options of the thing they will optionally be buying my stock with.

As I happen to have DeVCoins, GRouPcoins, I0Coins, BBQcoins and GeistGeld in stock, those seem appropriate to start out with; if all goes well I can expand my repertoire as I acquire stocks of other types of coins.

I have a very simple pricing model in mind, which amounts to figuring out how much I would sell the coins for if I straight out sold them there and then, then adding a fee that is basically the interest I want for tying up those coins for the maximum period of time the option could remain open.

For example if I am offering a million DeVCoins on Vircurex for 0.00000130 BTC per coin, I would sell an option to buy a million DeVCoins at that price any time in the next 30 days for a price equal to the interest I would charge for loaning a million DeVCoins for 30 days.

Does this sound reasonable? Pick it apart, find any flaws in the concept, please!

Even if it does sound reasonable, does it sound like something anyone would actually be interested in?

-MarkM-

[1714934246]

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[MadAlpha]

Sounds very interesting, even though I am not very experienced with these issues.

I guess to be really successfull, this would need an exchange where they would be traded? At which point you would probably need a mathematical formula for determining the price of the options? Would something like Black-Scholes work here? Sadly I am not good enough in math to understand any of it.

[markm]

TL;DR for now I am not contemplating people re-selling the options that I issue; basically they either exercise them or they don't.

I am not sure how someone would structure an exchange for trading arbitrary generic options, as there would be potentially thousands or even millions of strike prices, also potentially many many issuers of options. The issuers would have to use some kind of smart contract or something to set up the exercising of the options in a way that will not care who exercises them, something like anyone who knows the passphrase for the option can exercise it or something; but then the market where people trade such things would probably want to know the passphrase so it can provide it to the buyer, hmm.

I guess you'd have to give the passphrase to the market, who would use it to change the passphrase so you cannot exercise it anymore, then give that passphrase to the buyer if someone buys the option, or back to you if you cancel your offer of selling it.

I am dealing here just with the underlying, the actual genuine option. I had no plans yet to allow anyone other than the person who buys it to be able to exercise it, as all that kind of stuff can wait until there is enough traffic to make it worth even considering doing some automation to lessen my workload. If options turn out to be something that maybe once or twice a year someone decides to buy one of, automating it would be a massive waste of time, it'd be faster just to deal manually with those couple of people.

I will look into how smart contracts in Open Transactions could maybe help automate it though. Basically I would store the asset that someone is getting an option on into a variable inside the smart contract, to either be sent back to me on expiry or sold to them at any time at the specified price until expiry. I do not know if users who are signatories to smart contracts even own the contracts though, I think the server pretty much holds the thing, so I don't know if anything currently in the capabilities of the script language the smart contracts are written in would enable making a clause that lets the person having the option to buy sign away that right to someone else. I suppose it probably could be done, but that still does not solve the problem of how and where you would offer to sign it over to someone else for a fee. Just soliciting offers on a forum might work I guess, unless someone feels there is enough market for second-hand hand tailored smart contracts to make some kind of marketplace where you can define all the clauses of the contract you want to sell, in a way potential buyers can intelligently browse looking for contracts that contain clauses of types they might be interested in...

-MarkM-

[ancore]

i think you could do this with ripple

let's say you want to give someone an option of buying 1 BTC for 100 BBQcoin
you ask them to grant you a trust of "whatever you call that specific option" let say 1 BBQop (everyone can grant you this trust)
you sent an IOU 1 BBQop to that person (only you can do this, so only make 1 to the relevant person)
no real BBQcoin or btc changed till this point
now when this person wants to execute his options, he sends you the BBQcoin and you set an order 1 BTC for 1BBQop in ripple, only he can accept
this thread is about something similar only no options: https://bitcointalk.org/index.php?topic=155124.0

this person can trade his option to anyone who grants you a 1BBQop trust in ripple and you don't care who you ultimately pay  the 1 BTC  EDIT: I haven't done this part yet so I'm not sure

you would have to make a new name for every option though because only the other person can cancel your IOU back if he doesn't take the option

[markm]

Yeah cluttering up the server with expired options/assets is part of why I don't want to do them as assets in Open Transactions. No way to make an asset vanish if people still own it, still have accounts denominated in it and so on.

Smart contracts seem like the best way for now.

Or just not doing them at all, afterall there is no evidence that anyone is actually interested in such things so far so it is all kind of academic so far.

-MarkM-

[Kumala]

Did you check the Options feature on Vircurex?  Allows you as a user to underwrite options, such as:

- Buy option: allows the buyer of the option to buy from the issuer a number of coins at a predefined price
- Sell option: allows the buyer of the option to sell to the issuer a predefined number of coins at a predefined price

This can ofcourse be done in any coin combination.

Looks more or less what you want to achieve?

[markm]

Yes that sounds like it could be handy. I knew some sites had some options systems I just couldn't recall off-hand which sites.

i will take a look, thanks.

-MarkM-