$1000 Dec 2014 Call Option

[wheeler]

A work mate of mine (who isn't active in Bitcoin) was being all super-sceptical and bearish on BTC today in the office, saying it's going to crash further, it's a Ponzi, blah, blah.  I encouraged him to either put his money where his mouth is or shut his trap.  So we started to informally price-up a $1000 Call option expiring 11th Dec 2014 that he would sell.

I've calculated the recent realised vol (30-day rolling window), but was just wondering if anyone out there has quoted or traded options recently?  Any ideas where implied vol. would be bid out there?

https://i.imgur.com/IFLLOLl.png

Unfortunately, my buddy started out offered at 100% implied vol, but then flaked when I was keen to buy it...    He now seems tentative to sell 150% vol.  Anyone reckon that's value?

[1714184742]

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[1714184742]

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[pungopete468]

Hey, a win is still a win. Take what you can get; I think the odds are in your favor.

[ArticMine]

If he is writing a naked call, which I suspect this is. What is the security behind the option to back up the option he is willing to write. I mean if say BTC/USD goes to 50,000 will he be able to pay?

[wheeler]

Yeah, it's definitely naked so I know there's a credit-risk, but we work together and I know he's good for all but the most extreme outcomes.  Still I'm tempted to help him along by capping his downside (maybe making the deal a call-spread $1000 vs. $2000 or something - i.e. I sell him back a $2000 call), though it's a shame to lose the convexity to the upside.

[smoothie]

He will likely be kicking himself to sell at $1000 in December of 2014.

[ArticMine]

Yeah, it's definitely naked so I know there's a credit-risk, but we work together and I know he's good for all but the most extreme outcomes.  Still I'm tempted to help him along by capping his downside (maybe making the deal a call-spread $1000 vs. $2000 or something - i.e. I sell him back a $2000 call), though it's a shame to lose the convexity to the upside.

All I can say is given the past history of Bitcoin one should expect the most extreme outcomes.

[chriswilmer]

So, is the way this works that... on Dec. 11, 2014... he has to pay you the difference between the current BTC price and $1000?

So, if BTC was at $5000, he would owe you $4000, but if BTC was at $100, then you would owe him $900... is that right? What is the volume part all about?

[wheeler]

So, is the way this works that... on Dec. 11, 2014... he has to pay you the difference between the current BTC price and $1000?

So, if BTC was at $5000, he would owe you $4000, but if BTC was at $100, then you would owe him $900... is that right? What is the volume part all about?

I buy the right (but not obligation) to buy bitcoins from him at $1000 on 11th Dec 2014.  I would pay him a premium when we agree the trade.  If bitcoins are below $1000 on expiry then I don't buy from him (exercise) and he earns the premium.  If bitcoin is above $1000 I would buy from him and my profit = Current BTC price - $1000 strike - premium.

The value of such a contract (and hence the premium I'm happy to pay) depends on how volatile the bitcoin market is before expiry... that's what is meant by "vol"... volatility.  There's a lot of info on option on Wikipedia/Investopedia if you're interested.

[chriswilmer]

So, is the way this works that... on Dec. 11, 2014... he has to pay you the difference between the current BTC price and $1000?

So, if BTC was at $5000, he would owe you $4000, but if BTC was at $100, then you would owe him $900... is that right? What is the volume part all about?

I buy the right (but not obligation) to buy bitcoins from him at $1000 on 11th Dec 2014.  I would pay him a premium when we agree the trade.  If bitcoins are below $1000 on expiry then I don't buy from him (exercise) and he earns the premium.  If bitcoin is above $1000 I would buy from him and my profit = Current BTC price - $1000 strike - premium.

The value of such a contract (and hence the premium I'm happy to pay) depends on how volatile the bitcoin market is before expiry... that's what is meant by "vol"... volatility.  There's a lot of info on option on Wikipedia/Investopedia if you're interested.

Hah, I know it was a really newbie question and there is a lot of information out there, so I really appreciate your patience. I think I get it!

Can you exercise the trade anytime before Dec. 11, 2014?

[wheeler]

Can you exercise the trade anytime before Dec. 11, 2014?

It would be a "European" style option which means no early exercise (we're in London after-all).  On an asset like bitcoin there would never be a reason to early exercise anyway, since you would just be surrendering some of the time-value of the option (in which you could continue to make money by delta-hedging as the market moves - again check Options 101!)

[spiderbrain]

Do you mind helping with options 101? If bitcoin was $3000 in October, and then went down to $800 in December, how do you make money from only taking up the option in December...?

[wheeler]

Sure...

If I hold the call option in October and BTC is $3000, then I am almost certain that in December I will be exercising the option (i.e. buying a BTC for $1000).  Therefore, my exposure to the price of BTC (or "delta") is very nearly 1.  So to "delta hedge" myself I can sell 1 BTC in the market at $3000.  Meaning my total position is +1 delta from call option -1 delta from BTC sale = 0 delta net.

If subsequently the price of BTC drops to $800, say in November, it then appears unlikely I would exercise my option, so the delta of the option drops towards 0.0.  My position is now 0 delta on the option, -1 from my previous sale = -1 net delta.  So to "delta hedge" my new position I should buy 1 BTC in the market, which I can do at $800.

So just by hedging the option as the market moves, I've been able to sell 1 BTC at $3000 and buy 1 BTC at $800, making $2200 profit.  I'm sure you can imagine that the more volatile the market is, the more opportunities I have to buy low, sell high.  Therefore the buyer and seller express their views of future volatility when agreeing the premium on the option.  If I can make more money delta hedging the option that it costs me in premium then it's a good trade.  Everything is the exact opposite for the seller of the option (i.e. if he delta hedges the option he will be forced to sell low and buy high, but is compensated by the premium for doing so).

Hope that makes some sense!!

[spiderbrain]

Thanks! So you'll need to own bitcoins to hedge, right? There aren't any naked shorting facilities that I've noticed...

[aminorex]

Yeah, it's definitely naked so I know there's a credit-risk, but we work together and I know he's good for all but the most extreme outcomes.  Still I'm tempted to help him along by capping his downside (maybe making the deal a call-spread $1000 vs. $2000 or something - i.e. I sell him back a $2000 call), though it's a shame to lose the convexity to the upside.

Over 10k in december.  Just buy a freakin' coin and stuff the hedge.  Wasted money.

[Sindelar1938]

Aminorex might just be right here
Vol is a given but given likely mon-directionality mid to long term not sure you need a hedge

[BitcoinHawker]

What in the world made you think of options when all you need to do is just bet straight up. If bitcoin is over $1000 on Dec 31, 2014 he owes you x, if its below you owe him x.

I am not an expert with options but if you really are hell bent on muddying the water, I would suggest reading up on the Black-Scholes models. You can plug in variables(implied volitility, betas etc) into the equations. Good luck.

http://www.soarcorp.com/black_scholes_calculator.jsp

[CrashX]

We wont even see 800 for a long time.  GOX has damage Bitcoin for a long time. The Question is HOW LONG?

[theta]

A work mate of mine (who isn't active in Bitcoin) was being all super-sceptical and bearish on BTC today in the office, saying it's going to crash further, it's a Ponzi, blah, blah.  I encouraged him to either put his money where his mouth is or shut his trap.  So we started to informally price-up a $1000 Call option expiring 11th Dec 2014 that he would sell.

I've calculated the recent realised vol (30-day rolling window), but was just wondering if anyone out there has quoted or traded options recently?  Any ideas where implied vol. would be bid out there?



Unfortunately, my buddy started out offered at 100% implied vol, but then flaked when I was keen to buy it...    He now seems tentative to sell 150% vol.  Anyone reckon that's value?

Vol of 150% for far out of the money option seems about right.

[YipYip]

So, is the way this works that... on Dec. 11, 2014... he has to pay you the difference between the current BTC price and $1000?

So, if BTC was at $5000, he would owe you $4000, but if BTC was at $100, then you would owe him $900... is that right? What is the volume part all about?

I buy the right (but not obligation) to buy bitcoins from him at $1000 on 11th Dec 2014.  I would pay him a premium when we agree the trade.  If bitcoins are below $1000 on expiry then I don't buy from him (exercise) and he earns the premium.  If bitcoin is above $1000 I would buy from him and my profit = Current BTC price - $1000 strike - premium.

The value of such a contract (and hence the premium I'm happy to pay) depends on how volatile the bitcoin market is before expiry... that's what is meant by "vol"... volatility.  There's a lot of info on option on Wikipedia/Investopedia if you're interested.

Can I get in on this action


...lolz ..seriously ??

A naked call for 100 btc @ $1000 USD stamp/btc-e

[Cyberlight]

GOX has damage Bitcoin for a long time.

Protocol is working fine, no damage