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Author Topic: MASSIVE options order on apex.co  (Read 10568 times)
MatTheCat
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February 06, 2014, 12:58:05 AM
 #21

Thanks for translating Bugpowder. I think this is the second time you've jumped in and explained one of these things to me.

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February 07, 2014, 04:05:41 AM
 #22

Are those puts on the price?

That is someone selling puts to the MPEX bot.  They are going short 25,000 PUT contracts that are deep in the money. Note, that the contract is for the price of 0.1BTC.  So they are shorting puts with at strike price from $4100 - $5000 / BTC

About an $8,000,000 notional value on those contracts now.  Looks like a pretty smart play actually.  Current BTC price is $847.  It is extremely expensive to purchase calls or puts on MPEx due to the huge volatility premium.  But you can sell to the market maker for more reasonable mark up if you have additional backing capital deposited to cover the short risk.

Let's run the numbers :
If expiry happened today, simplifying calculations as if all contracts were P500Ts...
 (5000-847)/847*.1BTC = .490 price, or break even. 

But expiry in end of month, so by then,
If BTC drops to $700, (5000-700)/700*.1BTC = .614, or about a 25,000*(.49-.614) = 3100BTC loss
If BTC rises to $1000, (5000-1000)/1000*.1 = .4, or 25,000*(.49-.4) = 2250BTC gain

Love or hate MPEX, it is the only place in the world that has proven it can handle this sort of exposure. In fact, this is a pretty small position in BTC terms compared to what people were throwing around in march 2013.  I believe they paid out 19,407 BTC that month to people that bought calls, of which 15,000BTC was personally covered by Mr. Popescu, which appears to have wiped out all of the profits he made from the first 2 years of operations of MPEx.

He's deep under the water right now.
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February 07, 2014, 04:41:13 AM
 #23

Are those puts on the price?

That is someone selling puts to the MPEX bot.  They are going short 25,000 PUT contracts that are deep in the money. Note, that the contract is for the price of 0.1BTC.  So they are shorting puts with at strike price from $4100 - $5000 / BTC

About an $8,000,000 notional value on those contracts now.  Looks like a pretty smart play actually.  Current BTC price is $847.  It is extremely expensive to purchase calls or puts on MPEx due to the huge volatility premium.  But you can sell to the market maker for more reasonable mark up if you have additional backing capital deposited to cover the short risk.

Let's run the numbers :
If expiry happened today, simplifying calculations as if all contracts were P500Ts...
 (5000-847)/847*.1BTC = .490 price, or break even. 

But expiry in end of month, so by then,
If BTC drops to $700, (5000-700)/700*.1BTC = .614, or about a 25,000*(.49-.614) = 3100BTC loss
If BTC rises to $1000, (5000-1000)/1000*.1 = .4, or 25,000*(.49-.4) = 2250BTC gain

Love or hate MPEX, it is the only place in the world that has proven it can handle this sort of exposure. In fact, this is a pretty small position in BTC terms compared to what people were throwing around in march 2013.  I believe they paid out 19,407 BTC that month to people that bought calls, of which 15,000BTC was personally covered by Mr. Popescu, which appears to have wiped out all of the profits he made from the first 2 years of operations of MPEx.

He's deep under the water right now.

Yah... Valuation is based on the 24VWAP of all USD exchanges (from bitcoincharts).  The mtgox collapse hurts particularly bad then, as it figures into the level.

Current price $777.... he is down about 0.05BTC / contract, so 1250BTC or $1M.  The sick part is that to cover, he needs to buy back from the bot, and the spread the bot provides is a full 0.5BTC.  So he would need to spend 25,000BTC to close the position (for a 12,500BTC loss).  I suppose he will probably just sit tight...
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February 07, 2014, 07:05:35 AM
 #24

he's wishing it was at 700 at this point.
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February 07, 2014, 07:18:28 AM
 #25

There was large stack of puts sold on mpex.co yesterday.  Maybe the guy that sold them is trying to hedge on different exchanges?

http://mpex.co/

scroll down to
O.USD.P410T

oh, nevermind you were talking about mpex I though apex was some different exchange or something...
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February 07, 2014, 08:29:13 PM
 #26

he's wishing it was at 700 at this point.

He is now down about 3800BTC.

OUCHIE!
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February 07, 2014, 09:24:38 PM
 #27

Holy crap this makes my head hurt just trying to figure out how this whole thing works... So when someone buys put options they basically insure themselves against a price drop in the future. For instance if I had just bought 1000 BTC but wanted to insure myself against a price drop I could buy some put options with it that insure me that I can sell at a predetermined price at some point in the future or before it. So if the price crashes way below my put price I could choose to sell my BTC at the predetermined price. Now what happened here is that someone naked shorted those puts which makes it a little bit more complicated to wrap my head around. So basically someone borrowed puts that don't exist and sold those to that mpex bot, but he will have to buy those non-existing puts back at some point in the future. When the price goes down those puts will become more expensive, but if the price rises they will become cheaper. Did I get this right? As for the reason why someone would do that, I guess it's because there's not enough liquidity to do it through buying and selling actual BTC on the market.

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February 07, 2014, 09:39:11 PM
 #28

Holy crap this makes my head hurt just trying to figure out how this whole thing works... So when someone buys put options they basically insure themselves against a price drop in the future. For instance if I had just bought 1000 BTC but wanted to insure myself against a price drop I could buy some put options with it that insure me that I can sell at a predetermined price at some point in the future or before it. So if the price crashes way below my put price I could choose to sell my BTC at the predetermined price. Now what happened here is that someone naked shorted those puts which makes it a little bit more complicated to wrap my head around. So basically someone borrowed puts that don't exist and sold those to that mpex bot, but he will have to buy those non-existing puts back at some point in the future. When the price goes down those puts will become more expensive, but if the price rises they will become cheaper. Did I get this right? As for the reason why someone would do that, I guess it's because there's not enough liquidity to do it through buying and selling actual BTC on the market.

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February 07, 2014, 10:44:43 PM
 #29

Holy crap this makes my head hurt just trying to figure out how this whole thing works... So when someone buys put options they basically insure themselves against a price drop in the future. For instance if I had just bought 1000 BTC but wanted to insure myself against a price drop I could buy some put options with it that insure me that I can sell at a predetermined price at some point in the future or before it. So if the price crashes way below my put price I could choose to sell my BTC at the predetermined price. Now what happened here is that someone naked shorted those puts which makes it a little bit more complicated to wrap my head around. So basically someone borrowed puts that don't exist and sold those to that mpex bot, but he will have to buy those non-existing puts back at some point in the future. When the price goes down those puts will become more expensive, but if the price rises they will become cheaper. Did I get this right? As for the reason why someone would do that, I guess it's because there's not enough liquidity to do it through buying and selling actual BTC on the market.

Correct, except for the reason why he sold puts instead of buying calls is that the market-making bot charges a HUGE markup if you want to buy options from it.  But you can always sell to the bot for at least the current nominal value, so you get a better value selling to bot than buying from bot.  But then you have unlimited downside risk (in BTC terms).
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February 08, 2014, 08:59:07 PM
 #30

Holy crap this makes my head hurt just trying to figure out how this whole thing works... So when someone buys put options they basically insure themselves against a price drop in the future. For instance if I had just bought 1000 BTC but wanted to insure myself against a price drop I could buy some put options with it that insure me that I can sell at a predetermined price at some point in the future or before it. So if the price crashes way below my put price I could choose to sell my BTC at the predetermined price. Now what happened here is that someone naked shorted those puts which makes it a little bit more complicated to wrap my head around. So basically someone borrowed puts that don't exist and sold those to that mpex bot, but he will have to buy those non-existing puts back at some point in the future. When the price goes down those puts will become more expensive, but if the price rises they will become cheaper. Did I get this right? As for the reason why someone would do that, I guess it's because there's not enough liquidity to do it through buying and selling actual BTC on the market.

Correct, except for the reason why he sold puts instead of buying calls is that the market-making bot charges a HUGE markup if you want to buy options from it.  But you can always sell to the bot for at least the current nominal value, so you get a better value selling to bot than buying from bot.  But then you have unlimited downside risk (in BTC terms).

What is the significance of varying strike prices between $4100-$5000?

From what I understand it limits the upside potential, so if the price at the end of the month is $5000 or $10,000 it makes no difference.

But why would someone choose varying options between $4100 and $5000? Does the premium vary with the strike price such that shorting a put option with a strike price of $2000 is cheaper than one with a strike price of $5000? If so, does it indicate the person expects the price to be between $4100-$5000 at the end of the month?

Finally, what collateral was required to naked short the put options? And was that amount in USD or BTC?

Thanks
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February 09, 2014, 07:25:12 AM
 #31

Holy crap this makes my head hurt just trying to figure out how this whole thing works... So when someone buys put options they basically insure themselves against a price drop in the future. For instance if I had just bought 1000 BTC but wanted to insure myself against a price drop I could buy some put options with it that insure me that I can sell at a predetermined price at some point in the future or before it. So if the price crashes way below my put price I could choose to sell my BTC at the predetermined price. Now what happened here is that someone naked shorted those puts which makes it a little bit more complicated to wrap my head around. So basically someone borrowed puts that don't exist and sold those to that mpex bot, but he will have to buy those non-existing puts back at some point in the future. When the price goes down those puts will become more expensive, but if the price rises they will become cheaper. Did I get this right? As for the reason why someone would do that, I guess it's because there's not enough liquidity to do it through buying and selling actual BTC on the market.

Correct, except for the reason why he sold puts instead of buying calls is that the market-making bot charges a HUGE markup if you want to buy options from it.  But you can always sell to the bot for at least the current nominal value, so you get a better value selling to bot than buying from bot.  But then you have unlimited downside risk (in BTC terms).

What is the significance of varying strike prices between $4100-$5000?

From what I understand it limits the upside potential, so if the price at the end of the month is $5000 or $10,000 it makes no difference.

But why would someone choose varying options between $4100 and $5000? Does the premium vary with the strike price such that shorting a put option with a strike price of $2000 is cheaper than one with a strike price of $5000? If so, does it indicate the person expects the price to be between $4100-$5000 at the end of the month?

Finally, what collateral was required to naked short the put options? And was that amount in USD or BTC?

Thanks

I would be also really interested to get answers to these questions.
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February 09, 2014, 09:20:22 AM
 #32

You do realize that a whale planning to buy thousands of BTC would put in exactly this type of put option to hedge his position, right?
This would work only if the options payoff was in fiat. If payoff is in BTC, it has negative convexity that negates the hedge. If BTC goes to zero, the hedge will have made a lot of BTC, but still zero dollars.
On top of that, if BTC does collapse, the "whale" is going to learn about counterparty risk.
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February 09, 2014, 10:45:01 AM
 #33


But expiry in end of month, so by then,
If BTC drops to $700, (5000-700)/700*.1BTC = .614, or about a 25,000*(.49-.614) = 3100BTC loss
If BTC rises to $1000, (5000-1000)/1000*.1 = .4, or 25,000*(.49-.4) = 2250BTC gain

So if BTC is at $700, he has a 3100*$700 = $2170000 loss and if BTC is at $1000 he has 2250*$1000=$2250000 gain. Selling $2.2m worth of BTC at $850 or higher guarantees a riskless profit. It seems that the market making bot mispriced the options and someone took advantage of that ensuring an arbitrage.
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February 09, 2014, 03:49:34 PM
 #34

....
On top of that, if BTC does collapse, the "whale" is going to learn about counterparty risk.

I think this is a key statement for a variety of short type products available across the market.  The exchanges are all heavily vested in the price of BTC, and it BTC goes to $1, you will likely never see any proceeds of your short position.
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February 10, 2014, 04:18:30 PM
 #35

he's wishing it was at 700 at this point.

He is now down about 3800BTC.

OUCHIE!

this did not go well for them  Shocked

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February 10, 2014, 06:32:27 PM
 #36

Holy crap this makes my head hurt just trying to figure out how this whole thing works... So when someone buys put options they basically insure themselves against a price drop in the future. For instance if I had just bought 1000 BTC but wanted to insure myself against a price drop I could buy some put options with it that insure me that I can sell at a predetermined price at some point in the future or before it. So if the price crashes way below my put price I could choose to sell my BTC at the predetermined price. Now what happened here is that someone naked shorted those puts which makes it a little bit more complicated to wrap my head around. So basically someone borrowed puts that don't exist and sold those to that mpex bot, but he will have to buy those non-existing puts back at some point in the future. When the price goes down those puts will become more expensive, but if the price rises they will become cheaper. Did I get this right? As for the reason why someone would do that, I guess it's because there's not enough liquidity to do it through buying and selling actual BTC on the market.

Correct, except for the reason why he sold puts instead of buying calls is that the market-making bot charges a HUGE markup if you want to buy options from it.  But you can always sell to the bot for at least the current nominal value, so you get a better value selling to bot than buying from bot.  But then you have unlimited downside risk (in BTC terms).

What is the significance of varying strike prices between $4100-$5000?

From what I understand it limits the upside potential, so if the price at the end of the month is $5000 or $10,000 it makes no difference.

But why would someone choose varying options between $4100 and $5000? Does the premium vary with the strike price such that shorting a put option with a strike price of $2000 is cheaper than one with a strike price of $5000? If so, does it indicate the person expects the price to be between $4100-$5000 at the end of the month?

Finally, what collateral was required to naked short the put options? And was that amount in USD or BTC?

Thanks

I would be also really interested to get answers to these questions.

Answers :

Bot only quotes 1000 contracts at a time per strike, and occasionally sells out of a strike, so if you want to build a big position quickly, you can spread across multiple strikes.

The premium does vary across strikes, but this deep into the money there isn't much time premium.  However, the intrinsic value of each contract does vary across strikes.

From the FAQ : "Each CALL requires 1 BTC of collateral irrespective of strike. Each PUT requires an amount of collateral equal to strike / spot BTC . "

Everything is done in BTC, no fiat.

Yes, if price goes over $5000 by end of month, all the put contracts will expire worthless, and the seller will have pocketed ~12,500BTC.  So far it's not looking good for the seller though.

Yes, hedging declines in fiat valuation by buying puts fails if BTC price goes to 0.  There is a wide band in which it theortically works though. That said, winning trades on puts purchases are extremely rare due to the purchase premium and bitcoin's tendency to explode upwards.

If you think the bot is mispricing the options, you might be right, but probably are missing something.  Open a position if you think they are off!  You can trade MPEX securities here http://coinbr.com/ref?c=t1vLT2E7SK without paying the 30BTC registration fee.

Outlook :

The short puts whale might have been stopped out of his position, nobody knows. The bot has stopped quoting for now, presumably to prevent increased exposure from asymmetric news releases in a high volatility period. I imagine it will start quoting again soon.
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February 10, 2014, 06:57:26 PM
 #37

Thanks for translating Bugpowder. I think this is the second time you've jumped in and explained one of these things to me.

Yup....this is why the forum needs a thumbs up system. People need a means of showing approval and appreciation without spamming up the thread with posts like this one.

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Bugpowder
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February 10, 2014, 07:21:13 PM
 #38

And the bot is quoting again. Hey, only down 0.2BTC / contract...  Maybe he pulls it off, if he didn't get stopped out.  Currently down 5000BTC.
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February 10, 2014, 07:32:36 PM
 #39

Holy crap this makes my head hurt just trying to figure out how this whole thing works... So when someone buys put options they basically insure themselves against a price drop in the future. For instance if I had just bought 1000 BTC but wanted to insure myself against a price drop I could buy some put options with it that insure me that I can sell at a predetermined price at some point in the future or before it. So if the price crashes way below my put price I could choose to sell my BTC at the predetermined price. Now what happened here is that someone naked shorted those puts which makes it a little bit more complicated to wrap my head around. So basically someone borrowed puts that don't exist and sold those to that mpex bot, but he will have to buy those non-existing puts back at some point in the future. When the price goes down those puts will become more expensive, but if the price rises they will become cheaper. Did I get this right? As for the reason why someone would do that, I guess it's because there's not enough liquidity to do it through buying and selling actual BTC on the market.

Correct, except for the reason why he sold puts instead of buying calls is that the market-making bot charges a HUGE markup if you want to buy options from it.  But you can always sell to the bot for at least the current nominal value, so you get a better value selling to bot than buying from bot.  But then you have unlimited downside risk (in BTC terms).

What is the significance of varying strike prices between $4100-$5000?

From what I understand it limits the upside potential, so if the price at the end of the month is $5000 or $10,000 it makes no difference.

But why would someone choose varying options between $4100 and $5000? Does the premium vary with the strike price such that shorting a put option with a strike price of $2000 is cheaper than one with a strike price of $5000? If so, does it indicate the person expects the price to be between $4100-$5000 at the end of the month?

Finally, what collateral was required to naked short the put options? And was that amount in USD or BTC?

Thanks

I would be also really interested to get answers to these questions.

Answers :

Bot only quotes 1000 contracts at a time per strike, and occasionally sells out of a strike, so if you want to build a big position quickly, you can spread across multiple strikes.

The premium does vary across strikes, but this deep into the money there isn't much time premium.  However, the intrinsic value of each contract does vary across strikes.

From the FAQ : "Each CALL requires 1 BTC of collateral irrespective of strike. Each PUT requires an amount of collateral equal to strike / spot BTC . "

Everything is done in BTC, no fiat.

Yes, if price goes over $5000 by end of month, all the put contracts will expire worthless, and the seller will have pocketed ~12,500BTC.  So far it's not looking good for the seller though.

Yes, hedging declines in fiat valuation by buying puts fails if BTC price goes to 0.  There is a wide band in which it theortically works though. That said, winning trades on puts purchases are extremely rare due to the purchase premium and bitcoin's tendency to explode upwards.

If you think the bot is mispricing the options, you might be right, but probably are missing something.  Open a position if you think they are off!  You can trade MPEX securities here http://coinbr.com/ref?c=t1vLT2E7SK without paying the 30BTC registration fee.

Outlook :

The short puts whale might have been stopped out of his position, nobody knows. The bot has stopped quoting for now, presumably to prevent increased exposure from asymmetric news releases in a high volatility period. I imagine it will start quoting again soon.

thanks  Smiley
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February 10, 2014, 08:55:56 PM
 #40

When do the options expire?

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