MASSIVE options order on apex.co

[mccoyspace]

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

[1715048534]

1715048534

[1715048534]

1715048534

[fancy_pants]

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...

[Bugpowder]

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

He is now down about 3800BTC.

OUCHIE!

[Miz4r]

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.

[wobber]

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.

modern financial games that I do not understand.

[Bugpowder]

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).

[Dragonkiller]

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

[theta]

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.

[theta]

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.

[nmersulypnem]

....
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.

[bucktotal]

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

He is now down about 3800BTC.

OUCHIE!

this did not go well for them 

[Bugpowder]

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.

[BittBurger]

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.

+1

[Bugpowder]

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.

[Dragonkiller]

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 

[xyzxyzxyz]

When do the options expire?

[Dragonkiller]

When do the options expire?

end of the month

[Bugpowder]

Last Friday of the month, Romania time.

When do the options expire?

[Bugpowder]

Down 6500BTC. 

[Keyser Soze]

Down 6500BTC. 

Seems like he picked the worst time to short those options.