Everything you wanted to know about BTC options but were afraid to ask!

[fillippone]

Options on bitcoin have been accessible only to whales and on very specific exchanges as Deribit, but when Bakkt and CME, the two main traditional bitcoin exchanges will open the products to their clients option trading in bitcoin will become more widely accessible.
Actually, options trading has been available on Bakkt since December 9th, while CME will launch a similar product later this month, starting trading from January 13th.

Options are a difficult instrument to trade. This is true in traditional markets, but this is even more true in a wild market like bitcoin.

With this thread, I will try to give a few theoretical and practical hints on how to understand, price and use options.
I will start detailing what an option is, explaining all the characteristics of the options and what they mean for the investor.
Then I will briefly explain how to price them. I won’t explain the details of the mathematical model used to price those, because it would imply some advanced differential calculus nobody wants to hear about. What I will try to do is to convey what factors have an impact on option price and how to interpret those. I will also try to clear the field from some common misconceptions about options.

Last I will explain a few common strategies for options trading. Nothing too complicated, just a few examples on how to use them according to investment purpose: be it speculation or hedging.




INDEX

• Introduction
• What is an option
  
  • Strike
  • Time to expiry
  • Volatility
  • Example
• How to price an option
• Historical Volatility vs Implied Volatility
• Option strategies - How to use an option
  
  • Leverage Trading
  • Covered call writing
  • Collar
• Word of caution
• Useful resources:
  
  • Online Calculators:
  • Exchanges product informations:
  • Online courses:

What is an option


An option is a contract that gives the holder the faculty, but not the obligation, to trade an asset, called the underlying asset, before the expiry, the termination date of such contract.
The option that gives the holder the faculty to buy the underlying asset is called call option.
The option that gives the holder the faculty to sell the underlying asset is is called a put option.
The price at the trade will happen is called the strike price.
When an option generates a trade then we say it is "exercised", otherwise it simply ends without any trade put in place we say it is "abandoned".
If an option can be exercised only at the termination is called European Option, while if it can be exercised anytime before the termination is called American Option.
The price the buyer of the option pays to the seller, or the writer of the option, is called the premium.

If the market price is above the strike price, the call option is called "in-the-money", because in the case of American exercise it could be exercised with profit. Otherwise, the call option is called "out-of the-money".
If the market price is below the strike of the put option, the put option is called "in-the-money", because in the case of American exercise it could be exercised with profit. Otherwise, the put option is called "out-of-the-money".

If we look at a certain strike then, only call options or put option can be in-the-money, not both of them. For example, if we look at 10,000 strike options, the calls are now out-of-the-money, while puts are in-the-money.

At expiry, if the option can generate the underlying asset what has been priced is called “physical delivery”. Many commodity or financial options are physically settled. Alternatively, an option can regulate only the cash equivalent of the profit exercising the option itself: that expiry then an in-the-money option would deliver the buyer a cash amount equal to the difference between the asset price and the strike (in case of a call option) or the difference between the strike price and the asset (in case of a put option). In this case, the option is called cash-settled.

In the case of Bitcoin options, namely the Bakkt options on BTC futures, the option is physically settled: at the expiry of the option the in-the-money option generates an appropriate position in the underlying future. There’s only a peculiarity: as it is common on many commodity options, the option itself expires a few days before the future, so the holder of the in-the-money options has the possibility to close the future position before the actual delivery of the underlying of the future (the option has the future as underlying, the future has the bitcoin as underlying). This is why you probably heard some marketing nonsense where “Bakkt options allow you to choose the type of delivery: physical or cash)".


Before analysing mathematically how to price an option, let’s see that impact the pricing with the intuition.

STRIKE: The first element is the strike. Of course, the difference between the market price and the strike is the first hint at the value of an option. Intuitively the more an option is in-the-money, then the more such an option must have value. 
When an option is in-the-money, such an option has intrinsic value. For both call and put options, the intrinsic value is equal to the difference between the underlying price and the strike price: intrinsic value only measures the profit as determined by the difference between the option's strike price and market price.
When an option is out-of-the money instead, the intrinsic value is zero.
The intrinsic value is the minimum value of an option: if the value of an option would be less than the intrinsic value, could be arbitraged, buying that option and exercising it to profit.

So when BTC is trading at 7,000, a call with strike K = 5,000 is in-the-money and has an intrinsic value of 2,000, so the price must be greater than that. At the same time, a call with a strike K =10,000 has no intrinsic value, so the intrinsic value is zero.


Of course, intrinsic value is only a part of the pricing of an option: other variables impact the option pricing each one of them adding value to the intrinsic value getting the final value of the options:

TIME TO EXPIRY: the second most important element when pricing an option is the time to expiry: the longer the time to expiry, the dearer the option. If we price two options with all characteristics being equal, but the exercise date, the one with the exercise date the furthest away, will have the greater price.

VOLATILITY: the greater the volatility of the underlying asset, the greater the value of the option. Here the explanation gets a little bit tricky. Let’s say that the main reason it is not the greater the volatility of the underlying, the greater the possibility of the underlying going in-the-money. We will see later why this is important, just take in mind that is not obvious. The option buyer doesn’t profit from the option going in-the-money. Rather don’t profit only if the option goes in-the-money. The buyer of the option benefits just because the underlying asset moves (i.e. it is volatile) under a risk-neutral approach, i.e. without taking the “risk” of profiting because the option goes in-the-money.


Let's see an example:
We buy a call option on BTCUSD, with a strike price of 8,000 USD, expiring in June 2020.
The strategy is named Long call because buying something is called being "long" in finance jargon.
The premium for this option is 1,350 USD, we have to pay immediately ("upfront", again in finance jargon).

Fast forward to option expiry.
The outcomes of our option differ according to the final price of bitcoin:

If BTCUSD is below 8,000 USD the option is abandoned, it expires worthless.
If BTCUSD is above 8,000 USD the option is exercised, and generate a payoff equal to the difference (positive) between BTCUSD and the strike price.

In more formal terms the call option payoff is the following:

Call=max(0;Spot-Strike)

The final payoff of the strategy will be the following:



Note that this graph considers we paid a premium of 1,350 USD upfront, the premium must be paid in every scenario: if the option expires worthless the P&L (Profit&Loss) of the strategy is negative and equal to the premium paid, otherwise is equal to the option payoff netted with the premium paid.
Note that the P&L starts increasing at the strike price level, 8,000 USD in this case, but breaks even at a higher level equal to the strike + the premium plaid, or 9,350 USD in this example. 

Let's see the same thing for a put option.
We buy a put option on BTCUSD, with a strike price of 6,000 USD, expiring in June 2020.
The strategy is named long put.
The premium for this option is 732 USD, we have to pay "upfront".

Fast forward to option expiry.
The outcomes of our option differ according to the final price of bitcoin:

If BTCUSD is above 6,000 USD the option is abandoned, it expires worthless.
If BTCUSD is below 6,000 USD the option is exercised, and generate a payoff equal to the difference (positive) between the strike price and the BTCUSD.

In more formal terms the put option payoff is the following:

Put=max(0;Strike-Spot)

The final payoff of the strategy will be the following:



The graph looks familiar, as it is the symmetrical payoff than the call.
Note that this graph considers we paid a premium of 732 USD upfront, the premium must be paid in every scenario: if the option expires worthless the P&L of the strategy is negative and equal to the premium paid, otherwise is equal to the option payoff netted with the premium paid.
Note that the P&L starts increasing at the strike price level, 6,000 USD in this case, but breaks even at a lower-level equal to the strike - the premium plaid, or 5,267 USD in this example.
 

Let’s have a look at an options exchange looking for confirmations.
All the examples are from Deribit, who is the only widely available source for option prices: creating an account is easy and don’t require KYC. If you are interested to do it for educational purposes. Of course standard disclaimers apply and I am not by any mean linked to that exchange.

If we select BTC options, and then 26 Jun 2020 we will find a screen like the following:


(click on the image to enlarge it)

This particular page considers the options maturing on 26 Jun 2020.
The centre grey column represents the strike levels. The options on the same row share the same strike price.
On the left of that column, we have the call options for each strike, while the puts are on the right-hand side.
The bid price is the price where other participants want to buy the options, i.e. the price you have to sell at if you want to sell it.
The ask price is the price where other participants want to sell the options, i.e. the price you have to pay for if you want to buy it.
Each bid and ask price has a corresponding Implied Volatility level, that is the volatility level that, if inputted in the model, gives back the aforementioned price.
This is why speaking of options, volatility and price are exchangeable concepts.

As we saw earlier, we see that the calls have a diminishing price when the strike goes up: the 6,000 call has a mid-price (the average between the bid and the ask) of 0.29725 BTC, while the 10,000 call has a mid-price of 0.11275 BTC.
The opposite is true for the puts. The puts with lower strike have lower premiums.
The put stuck at 10,000 has a price of 0.46075 BTC, while the 6,000 put has a mid-price of 0.09725 BTC.
Also, we can see that examining options with greater time to expiry each option has a greater value: the 10,000 USD strike call maturing in September has a value of 0.16775 BTC versus the value of 0.11275 of the same option maturing in June. The 6,000 strike put has a value of 0.13175 BTC versus the value of 0.09725 of the same option maturing in June.

If we plug the data we find on that page in an options calculator we can reprice the option itself.
If we try to reprice the 8,000 USD call, inputting 0% as the interest rate (BTC is a non-dividend paying asset) and the correct information about strike, underlying and implied volatility, we get the (almost) exact valuation we have on Deribit: 



The numbers below the option price are the "greeks" or the  sensitivities of the option price to their various component:

DELTA: it's the sensitivity of the option price to the underlying: if the underlying goes up 1 USD, the option price goes up 0.55 USD.
GAMMA: it's the second-order sensitivity of the option price to the underlying: if the underlying goes up 1 USD, the option delta goes up 0% (I guess there's a rounding factor here to consider in this calculator)
VEGA: it's the sensitivity of the option price to the volatility level: if the volatility goes up 1%, the option price goes up 20.54 USD.
THETA: it's the sensitivity of the option price to the time: if 1 day passes, the option price goes down 4.39 USD.
RHO: it's the sensitivity of the option price to the interest rates: if interest rates go to 1%, the option price goes up 13.49 USD.

The greeks of an option are linked to each other in a pretty complicated way, there are many ways to interpret them and they all varies continuously given the level of the market, the volatility and the time to maturity.
Books have been written on how to tame them and use them in your favour. I think this very brief explanation is enough for this thread.


How to price an option

Understanding the details of how options are priced, would mean understanding very advanced mathematics, including stochastic calculus, differential calculus, statistics, etc.

Here I want only to give you a few important concepts, you have to keep in mind when thinking of options and their value.

Black&Scholes won the Nobel prize for their option pricing model. Their biggest achievement was to demonstrate it is possible to price an option using non-arbitrage conditions. Arbitrage is a trade where a profit is gained involving no risk and no capital. Of course, those trades do not exist, so markets will adapt themselves to avoid these situations. Reasoning under the “non-arbitrage” conditions, means also that no risks are involved, hence the individual appetite for risk of each different trader in the market can be taken out of the equation. This means that every trader in the market will reason using the same “language” of a world without risk (if we reason with no-arbitrage conditions, we can ignore the associated risk, then we can ignore the willingness of every trader to take that risk). This means the price of such a derivative is unique, irrespective of the risk appetite for each trader. This has the important consequence the price of an option is INDEPENDENT of the probability given by each trader about the possibility of the underlying ending in-the-money. This is something we have to keep in mind: the price of an option doesn’t mean automatically that the scenario where it ends in-the-money is more “plausible”.

Historical Volatility vs Implied Volatility

As we can see the only “difficult” input to price an option is the volatility to be used.
The correct number to be plugged into the pricer is the expected future realised volatility until the expiration of the option. Quoting this number means quoting the price of the option (being the other option pricing numbers deterministic, i.e. known without uncertainty).
The volatility level used to price an option is called implied volatility because it’s the level of volatility “implied” by the quoted price.
How do you quote the future volatility?
Here’s the trick of options trading.

The first idea is to look at the realised volatility: looking at the past can give first guidance of the future volatility. Of course, this is not always true as there can be many factors that can change the volatility in the future. One easy example, specific to bitcoin options could be the halving. This event, according to many models, could have a great impact on the bitcoin price. So we can guess that coming into the halving the volatility will be low: bitcoin might move, but without great variations, but once the halving happens, the price will possibly start swinging more, due to the very different valuation the S2F model implies. In this case realised volatility won’t be good guidance for the future volatility: namely the realised volatility will be much lower than the future volatility used to price options with expiries after the halving.

Many websites calculate the realised volatility of bitcoin: on Deribit you can get one.


Calculating historical volatility with different horizons yield very different results:



In the above graph, we see the bitcoin price (black line, left axis), with the superimposition of different historical volatility calculations using different terms (yellow, red and blue lines, right axis). Volatility in the short term can be more “volatile” itself (yes, there is the volatility of volatility, but this is for advanced options trading). The yellow line represents the annualised historical volatility calculated using the previous 10 trading days, and as we see in the above graph is swinging more violently, from 180% to below 20%. Volatility calculated over more extended periods of time, like the blue line (calculated over the last 30 days of data) or the red line (calculated over the last 180 days of data) is instead more and more stable as we extend the calculation interval.
Of course, we are more interested in matching, with the caveat earlier explained, the historical volatility computation with the time to expiry of the option we want to price.


The implied volatility can instead be observed on options markets. If we look at the options screen above we see some IV columns: that is the implied volatility corresponding to each quote. If we use the model in the opposite way, we can use the price as an input and find the volatility implied into that price: that is the implied volatility.



Option strategies - How to use an option


Options are very complicated instruments, here I want to highlight only a few uses of them.
These are the most simple ones, and all have in common to be “static” strategies. This means those are meant to be put in place and not touched until maturity. There are different strategies meant to be adjusted during the life of the option. These are totally different animals and they are called dynamic strategies.


Leverage Trading

Scenario:
You want to gain as much possible exposure to bitcoin.
You have a very clear trading view.
You are not interested in losing your capital if this view doesn’t materialise.

Strategy:
Use your funding to pay the premium for an out-of-the-money option, choosing the strike to maximise the expected final payout.

Example:
- Buy 1 call option strike 7,000 USD, Jun Expiry at 0.233 BTC.
alternatively
- Buy 1 call option strike 8,000 USD, Jun Expiry for a total of 0.1805  BTC.
 


Analysis:
In this scenario, you have gained exposure to the appreciation of bitcoin above the strike level using only a fraction of the capital required to buy the underlying (i.e. 1 bitcoin).
In the case of bitcoin being at a price of 10,000 at expiry, in the case of a bitcoin investment, you would have a return equal to (10,000-8,000)/8,000=25%.
This is the base case scenario of no leverage.

Buying an in-the-money call option the return would be instead (10,000-7,000-1,742)/1,742=72%.
Note that if the option gets further in-the-money the return goes up even further as the option paid is constant, while the gain increase linearly.

In the second example, we bought an out-of-the-money option, using even less capital.
In the case of bitcoin being at a price of 10,000 at expiry, the yield would be in this case (10,000-8,000-1,350)/1,350=48%.

Of course in the scenario of an opposite movement, your loss is limited to the premium paid, which would be lost entirely.
This implies that you have to choose wisely not only the strike level, to gain the correct level of exposure, but also the expiry, as the movement has to materialise Before the expiry of the option.


 
Covered call writing
Scenario:
You are a whale you want to sell part of your bitcoin holding to finance your daily expenses. You are bullish on bitcoin as an investment.

Strategy:
Sell out-of-the-money calls, cash in the premium to finance your expenses, actually sell bitcoin only if the price goes up (possibly on a spike).

Example:
- long 1 bitcoin,
- sell 1 option strike 10,000 USD, Jun Expiry at 0.11 bitcoin.



Analysis:
The payoff of the structure gives you a benefit over the simple holding of bitcoin equal to the premium if the price is below the strike price at maturity.
If at expiry the price is above the strike, the option goes in-the-money and you sell the bitcoin.
The strategy has a break-even, compared to being long the BTC only, at a level equal to strike + premium received (in this example at 10,000+0.11*7,478=10,826 roughly).
If the BTC goes further up, you basically sold a bitcoin at 10,826, hence the strategy has a lower value against holding the bitcoin.


Collar
Scenario:
You are a whale.
You want to sell part of your bitcoin holding to finance your daily expenses.
You are bullish on bitcoin as an investment.
You get pissed off in case of a violent drawdown in bitcoin prices.

Strategy:
Sell out-of-the-money calls, cash in the premium to finance your expenses, actually sell bitcoin only if the price goes up (possibly on a spike).
Use the cashed-in premium to buy protection on the downside, i.e. buying a put option.
Buying an out-of-the-money call and selling an out-of-the-money put is a strategy known as "Collar".

Example:
- long 1 bitcoin,
- sell 1 call option, strike 10,000 USD, Jun Expiry at 0.11 BTC,
- buy 1 put option, strike  6,000 USD, Jun Expiry for 0.098 BTC.



Analysis:
The final payoff is similar to the one of the covered call writing.
The payoff of the structure gives you a benefit over the simple holding of bitcoin equal to the difference between the premiums paid to buy the put and the premium cashed in to sell the call. In this particular case, I chose two strike levels to have the smallest positive difference between the twos. If the price is below the strike price at maturity.
If at expiry the price is above the strike, the option goes in-the-money and you sell the bitcoin.
The strategy has a break-even, compared to being long underlying, at a level equal to strike+premium received (in this example at 10,000+(0.11-0.098)*7478=10,093 roughly).
If the BTC goes further up, you basically sold a bitcoin at 10,093.
On the contrary, if BTC goes down, you also bought protection at 6,000, as you are long a 6,000 put. More precisely, as you cashed in a premium of 93 dollars, you are protected at a 6,093 USD. In case bitcoin goes down more, you are not affected, as the payoff of the put protects you on the downside.


Word of caution.
Options are a very complicated topic.
I tried my best effort to explain this topic in the most simple and intuitive way.
I can expand the thread in the direction you prefer. Just ask me to explain what you are interested in most, or just ask me to clarify the point you want me to dig more precisely.


If you think this thread or any other of my threads is worth being translated in your own local board, please do! I will be happy to provide assistance!


Useful resources:
Online Calculators:
Option Calculator

Exchanges product information:
Option on Bakkt ™ Bitcoin (USD) Monthly Futures
Options on Bitcoin Futures

Online courses:
Basic: CME Option Course
Advanced: Options Theory for Professional Trading

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I am lucky enough to be able to express myself in at least a couple of languages, but I know this is not the case for everyone.
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I think all those users are missing a lot of good contents posted on the international (English) section or on other boards.

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[1714909519]

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[1714909519]

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[fillippone]

A nice tool to monitor the options market is the dashboard provided by skew.com:

Bitcoin Options Dashboard by Skew

I will try to explain how to interpret the various graphs.

BTCUSD Spot

Nothing to see here, a simple graph on a linear scale. Pretty Standard, just to orient ourself checking the other graphs.


BTCUSD Realised Volatility

We already saw this graph in the OP: this is the historical bitcoin volatility, computed using different time horison. We already noticed the realised volatility observed over longer periods tends to be more stable.

BTC Options Volumes

In this graphs we see the trading volumes of all options on the different exchanges. We see the vast majority of options has traded on Deribit. I think this is going to change with the launch of the two biggest exchanges BAKKT and CME. Bakkt has actually already launched, but it is barely noticeable. We already noticed Bakkt is a slow starter, but when he got his product rolling, they were slowly grinding volumes.

BTC ATM IV

This graphs is similar to the historical volatility one, but instead focus on the Implied Volatility. They compute the implied volatility of an at-the-money option (strike price euqalt to forward price of bitcoin) expiring at various tenors: 1m, 3m and 6 months in the future. So this represent the future expected volatility of bitcoin over such horizons. We notice that implied volatility is moving more for shorter term options, and its more stable for longer tenor options.

BTC 25d Skew

This charts start giving out very technical infromations. This measures the difference in implied volatility terms between two options maturing on the same date. The lines measure the difference in implied volatilites between an out of the money call and an out of the money puts. Both options are chosen with a strike having 25% delta (hence the 25d in the chart title). So the strikes are not fixed in dollar terms, but in "moneyness" or "distance" from the current market levels, so the measure is consinstent over the various market phases. A positive number means call Implied volatility is higher than the put volatility, this means volatility is expected to rise in an upward movement (probably more people wants to buy upside options because want to leverage the price of bitcoin.

BTC ATM Volatility Structure

This is the level of implied volatility of the options expiring at the various dates expressed below. This gives a similar information as the BTC ATM IV graphs (and informations are actually consistent), losing the historical part , but giving more informations on the expiries, axpressed as fixed dates r(probably expiries dates at the various exchanfges) rathr than "rolling dates (1m, 3m and 6m).

Probability of BTC being above x$ per Maturity

This is a tricky one.
I don't knwo the details of the calculation of this graph, but I think it is greately misleading.
The shape of the graphs looks very like the delta of an option with a given strike. Delta of an option can be tought as the risk-neutral probability of an option of being in the money. Well, the kew is that one: risk neutral probability are very different from real world probability. So, O dosmiss this graph as "manure". Please don't draw conclusion from that particular piece of information.

BTCUSD - Implied Volatility vs Realised Volatility, Daily

This is a very intresting graphs. It combines the realised volatility with the implied volatility over the same horizon: so this graph answers the following quiestiins: "Which level of volatility are markets pricing in, compared to the one they observed in the past?". The graph plots the volatilites over a 3m horison: currently the Implied volatility is pricing above the realised: market are currently expecting volatility to go up on the next months (probably due to the halving event in 5 months).

Deribit BTC Options Volumes

Pretty straightforard graph. This is the volume of traded options today on deribit. Please not that this is the notional of the options, not the sum of the premium paid.

Deribit BTC Options Flows

This graph details if the sign of the flow, buy or sell, and the type of option call or put. Of course for every trade there is a buyer and a seller, but when a trade happens on the ask side of the price it's conventionally clasified as a "buy", while when a trade happens on the bid side ofthe market it's called a "sell".
We see that the majority of trades are on the call side (this is actually intresting) without much imbalance between buy and sell, so a nice, liquid two ways market.

Trade >50 BTC Option Monitor

This graph is actually a blotter of the trades that happened on the exchange. Most relevant trades are highlighted. Can give a sense of how the big swinging dicks are trading, but it is always very difficult to extract meaningful information from those blotter without having a complete view of the position under management (i.e. buying 500 BTC put as leverage trading, is vert different buying 500 BTC put becasue you are also long 1000 BTC and you want to protect from the downside).

Deribit BTC Option Call/Put Ratio

Put Call Ratio is the ratio of the trades on Calls versus the trades on the Put. Again, it's a graph very common amonsgt traders, but with limited or very diffciult information value, in my humble opinion.

[fillippone]

Deribit BTC Options Buy/sell Ratio

This graphs details if the trades happened on the buy side (asks lifted) or on the sell side (bids given). Again, it's difficult to understand the final positioning looking only at this kind of graph, but a shift in the current state of ratio can signal a shift in general sentiment. Of course, buys and sells should add to 100%. This is not the case in this graph I have no idea why, sometime the sum is below 100% or sometime is even bigger than 100% (on both case there's a white space above to get to 100%).

Deribit BTC Options Short-term/Long-term Ratio

This graphs again splits the total trades between short term options and long term options. There's no hint on what they mean by short term, but the fact that short term options are more actively traded could potentially mean the trading aspect of those instrument, as opposed to hedging purpouse, has more appeal to traders.

Total BTC Options Open Interest

AS i detailed on my thread on future ( Everything you wanted to know about BTC futures but were afraid to ask!) Open Interest is a concept often confused with volume. In reality open interest specify the amount of "Open Positions" on the exchange, or the sum of positions that will ultimately could potentially lead to a future settlement. From here we see again that Deribit is by far the most important exchange, with LedgerX and Bakkt Barely noticeable. Again, I do expect this to change in the near future.

BTC Options Open Interest by Strike (kBTC)

This graph breaks down the Open Interest by the various strikes each position is written on. Looking at this chart we have a glimpse of the strike levels where lies the more interest of the markets. Also, near expiries, large open interest position could act as "magnets" or "barriers" to BTC price, because the hedging positions of option market participants (even thou the total option volume should be a few times bigger to impact hte more liquid spot BTC market).

BTC Options Open Interest by Expiry(kBTC)

Same as of above, this time the Open Interest is split by the various expiries. Looking at this chart we have a glimpse of the maturity where lies the more interest of the markets.

BTC Jan20 Vol

As we have seen in the OP the volatility level is not constant for each strike. Here this graph tries to model an implied volatility skew out of the quoted prices. On the call side (the blue lines) we see the prices being consistently narrow, while on the puts the spread is narrow where the options are in the money, while it widens considerably for in the money puts.
As the most actively traded options, i.e. the ones we can expect to have more reliable prices, are the out-of-the-money options, these options are the one we consider to fit a volatility smile: so on the right hand of the graph we use the call implied volatilities, while on the left part of the picture we use the puts implied volatilities. As you can see the sum of the two curves, represented by the black dotted line, is quite well shaped.

Back Months Vol Vol

These graphs are conceptually identical to the previous one, but they are actually reporting the implied volatilities on back months, or longer expiries. As traded volumes and liquidity here is lesser, the graphs are not really well shaped: basically there are no reasonable offers for many puts, so the Y-axis explodes causing the graph to be actually unreadable.

[jostorres]

This is really cool and I have to admit that this is one of the greatest things that has happened in the cryptocurrency community, though I have seen some news that relates to Bakkt that once made me lose interest in them, but as time goes on we will get to know the truth.

Option trading is really good and this is not the first time that I have been part of it, I have always made use of Robinhood platform which was a really good choice since it’s a free and no commission platform. There are also other good platforms that I have known, I stopped option trading a long time , but I’m looking back into it.

[The Sceptical Chymist]

Looks like a great summary of options, OP, though I didn't read the entire thing.  I never traded options in the stock market and don't have any interest in doing so with bitcoin, so I pretty much know all I'm ever going to need to know about them--and options/futures/derivatives never interested me all that much.  I'm of the Warren Buffett school of thought, whereby it's better to own a stock or bond or whatever rather than a derivative of the same.

But I'm sure there are people here who don't really know what options are all about, and it's good that you created this nice summary.  It definitely gives you an idea of what goes on at places like Bakkt and the CME.

[exstasie]

Great stuff, fillippone. I've been trading for nearly a decade and I've always avoided options due to the complexity underlying their market pricing. It'll take a while for this to sink in but I really appreciate the breakdown.

[rijaljun]

Options are a difficult instrument to trade. This is true on traditional markets, but this is even more true in a wild market like bitcoin.

TL:DR, but I love this statement. People should not doing option trading because it is more complicated, much harder and more risky than spot trading. It would be good to make this as a 'warning' cause we don't want people to lose their money at any trading.

If anyone wants to try this, they must be ready for everything that could happen during the journey.

[drlukacs]

Wow, I really admire your understanding. I confess I am a young person and I often learn about the indicators to make money and rarely learn about the volumes of Bitcoin or the options. Now, after reading the entire article, I realized that this is a way for us to look at the whole picture of the market and look further. Thank you for taking the time to create this article so that everyone can understand more about Bitcoin.

[Blitzboy]

Well, it really is a useful knowledge. Now I understand why you have a huge amount of merit after 1 year of activity on this forum. I admire your understanding, I have just learned about the trading options recently, some of the options you have given here are completely new with me. Thanks for your great contribution, not only me but others also need topic like this from you. We have a big picture here to admire and learn.

[fillippone]

Looks like a great summary of options, OP, though I didn't read the entire thing. 
<...>

Great stuff, fillippone.
<...>

Options are a difficult instrument to trade. This is true on traditional markets, but this is even more true in a wild market like bitcoin.

TL:DR, but I love this statement. People should not doing option trading because it is more complicated, much harder and more risky than spot trading.
<...>

Thanks you guys for the appreciation!
Yes, it was a long thread to read, but rest assured it was even longer to write!
As I had to try to figure out the most important things to describe and explain, please let me know via comment which aspect you want me to dig a little bit more!

[1Referee]

I was always recommended to stay away from options by traders who are farther in every facet than I am, which I respected but I kept wondering what made options so complicated and risky to trade. This puts things into perspective and I thank you for that. It kinda makes me happy that I didn't proceed to mess with options despite their utility (utility only for those who understand their workings).

I'll just stay within the areas of trading I'm comfortable with. No point in taking on more risk and complicating the whole process of trading. Simplicity is worth a ton.

Bakkt should provide a similar explanation since their aim is to be a retail platform, but I'm pretty sure that they won't go that far because it may scare off a lot of people.

[fillippone]

Hello,
CME made available the full specification of their BTC options.
Of course we are talking about cash settled options here.

Options on Bitcoin Futures

[lixer]

Option trading is really cool and there was a time I used to think that it was the same thing with stock trading and after a bit of research I got to understand that there’s a difference between the both of them. Option traders benefit from variety of stock market outcomes as you have explained here.

I haven’t taken the time to dig into this option trading and understands how it really works, but I’m going to do that soon, and thanks for taking your time write down all these, it’s not easy, not everyone can take out time to break it down like this.

[sisule]

Option trading is really cool and there was a time I used to think that it was the same thing with stock trading and after a bit of research I got to understand that there’s a difference between the both of them. Option traders benefit from variety of stock market outcomes as you have explained here.

I haven’t taken the time to dig into this option trading and understands how it really works, but I’m going to do that soon, and thanks for taking your time write down all these, it’s not easy, not everyone can take out time to break it down like this.

Not always trading can give solution for getting profit because many beginner not understand about how to start trading with bitcoin and altcoin, they look just allowing what other said about which one have to buy and trade, they not really understand about way how to begin with trading and choose best coin can give much profit with their way in trading.

[Last of the V8s]

Miners have always found these instruments useful for hedging their investment, and Bitmain caught on to it recently
https://coincodex.com/article/6270/bitmain-will-offer-put-options-on-bitcoin-to-mining-hardware-buyers-as-defense-against-price-decline/
Perhaps you could explain how it all helps the miner?

[fillippone]

Miners have always found these instruments useful for hedging their investment, and Bitmain caught on to it recently
https://coincodex.com/article/6270/bitmain-will-offer-put-options-on-bitcoin-to-mining-hardware-buyers-as-defense-against-price-decline/
Perhaps you could explain how it all helps the miner?

This is very interesting example, and one of the classic use case (wondering why I didn't add it to the OP).

Basically a miner is exposed to Bitcoin price fluctuation.
They have to pay huge costs in fiat (hardware cost is still anchored in USD -even if paid in BTC-, other costs are mainly paid in fiat (electricity, other costs, workforce etc).
Their income is instead denominated in bitcoin.
Miners are then forced to sell a certain amount of their BTC income to cover their fiat expenses.

In case bitcoin goes up, they will be able to sell bitcoin higher for higher profit.
In the opposite scenario they have to sell bitcoin lower to cover they cost, thus reducing their margins.

Basically, they are LONG BITCOIN: their profits move with bitcoin price.
Graphically the situation is the following.

Today the price of bitcoin is USD 8,000.

If BTCUSD goes to 10,000 they can sell this bitcoin for a USD 2,000 profit, compared to today.
If BTCUSD goes to 5,000 they can sell this bitcoin for a USD 3,000 loss, compared to today.

Basically their profit analysis is something like that:



At 8,000 they are at breakeven, they lose below USD 8,000 and they gain above.
They are totally exposed to BTC price fluctuation, they get the swings on both sides.

if a price goes up there is no problem, the miner can pay his bill, and enjoy the profit.
If the price goes down, there are serious problems: not only the miner is forced to sell at loss to cover his expenses, but he will be forced to sell more BTC to cover the same amount of USD costs, forcing him into an a death spiral.
The solution is buying an insurance, or buying a put.

The miner pays a premium in every state of the world to cover himself from a negative outcome (BTC USD Price going down).
The negative outcome is avoided with a payoff when the BTC USD goes below a certain level.
This payoff is the put option we saw earlier:
Put=max(0, Strike- BTC)

In the example in the article, Bitmain embedded a MARCH 5000 put in the package (Bitmain sells the put to the miner, who buys it).
In the OP I reported the JUN prices, so imagine the same structure , but on JUN expiry.
The offer for a 5,000 PUT on JUN is 400 USD (399,97 for the nitpickers, let's round it).
What happens at various levels of BTC price:

Let's do some calculations.
I prepared a sspreasheet with some levels:



At 3,000 BTCUSD being long the BTC would imply a loss of 5,000 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and a positive payoff of 2000=max(0, 5,000-3,000), for a total of a-5,000-400+2,000= -3,400

At 5,000 BTCUSD being long the BTC would imply a loss of 3,000 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and zero payoff as max(0, 5,000-5,000), for a total of a-3,000-400+0= -5,400

At 8,000 BTCUSD being long the BTC would imply a breakeven.
Having bough a PUT option would have implied an additional cost of 400 USD, and a zero payoff as 0=max(0, 5,000-8,000), for a total of 0-400+0= -400

At 8,400 BTCUSD being long the BTC would imply a gain of 400 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and a zero payoff as 0=max(0, 5,000-8,400), for a total of 400-400+0= 0

At 10,000 BTCUSD being long the BTC would imply a gain of 2,000 USD.
Having bough a PUT option would have implied an additional cost of 400 USD, and a positive payoff of 2000=max(0, 5,000- 8,400), for a total of 2,000-400+0= 1,600

Summing up, the payoff would have been:



AS you can see , the miner , the buyer of the put options gives up a little bit of gain upside, to buy a protection in case of a lower catastrophic BTC price event.
This is the typical example of an option bought for hedging purpose.
Please note as the total payoff has a lower risk for the miner: the miner has decreased his risk using this derivatives: this is quite opposite of the mainstream version of derivatives as dangerous instruments.

[pugman]

Dude this is amazinnnngggg!! Its a very good,elaborated and a very neat explanation of options. I didn't read through all the practical thingies you wrote, cause it will fuck with my brain, and thanks for the heads-up cause I am never gonna trade options cause it is definitely not something I would want to risk my money into. But the concept in general isn't quite so bad.

You did a phenomenal job in explaining the meaning of what options are, and how they work. Its not everyday where you see proper threads with proper explanations here on bitcointalk.

I am still a little confused about the whole thing, I like understood it for a minute, and went like, wait hold on a minute, "How, what, HUH?" and its full Chinese noodles in my head :/

I am gonna read the whole thread again, for a hopeful better understanding. Seems interesting, not gonna lie.

[fillippone]

Gentle reminder:
today CME is starting to trade option:


CME’s Bitcoin Options Launch Today, Here’s What To Expect

CME recently announced the launch of its newest product that will allow customers to trade options on Bitcoin futures. It’s scheduled for release today, January 13th. Some believe that it will attract further attention from institutional investors.

In fact, a group of JP Morgan analysts, led by Nikolaos Panigirtzoglou, expressed their views on the matter. He noted that the total interest towards CME has grown with almost 70% from year-end. This could be coming as a result of the options contracts:

“There has been a step increase in the activity of the underlying CME futures contract. This unusually strong activity over the past few days likely reflects the high anticipation among market participants of the option contract.”

It’s worth noting that Bakkt, the Bitcoin Futures trading platform of the Intercontinental Exchange (ICE), previously launched Bitcoin’s monthly options. Panigirtzoglou acknowledges this, but he doesn’t consider Bakkt’s volume to be sufficient enough at the moment, calling it “rather small.” The researchers believe that since CME has been more dominant in the Futures market, its options on Bitcoin will have a more significant impact.

Indeed Bakkt has been quite downbeat about their launch, and data on skew.com have struggled to show any relevance of their option volume. So yes, I think the BAkkt launch has been quite disappointing.

EDIT: Apparently a block trade already went trough: 5 options maturing on FEB 20 (expiry 28 Feb 2020) 8,500 strike went togh at a level of 630, corresponding to an implied level of 65.15% with the future at 8220.
This implied level is totally compatible with the one observed on deribit.
Nice!

[Saint-loup]

Okex launched its option market just few days ago.
https://www.newsbtc.com/2020/01/11/okex-bitcoin-options-trading-now-open-for-all-gets-great-response-from-community/

Specifications of the Okex options :
https://okexsupport.zendesk.com/hc/en-us/articles/360037737011-1-OKEx-Options-Introduction


FTX the plateform in which Binance recently invested tens of millions $ launched its option market this week-end.
https://eng.ambcrypto.com/bitcoins-option-trading-hits-1-million-volume-2-hours-after-ftxs-successful-launch/

specifications :
https://help.ftx.com/hc/en-us/articles/360038094432-Options-Explainer

[fillippone]

Thank you for these updates.
Very interesting seeing new competition in the market heating up.
Of course one big question mark is the accessibility of these markets for institutional and private customers and their adherence to KYC/AML regulations.
Deribit is having some issue on the matter as we speak and they are going to transfer to Panama (effectively cutting out every institutional clients.
 
Ps. Out of merits now! Will provide as soon as I get some!

[fillippone]

Some more detail on FTX.

Crypto Derivatives Exchange FTX Launched Bitcoin Options Trading

Cryptocurrency derivatives exchange FTX has launched Bitcoin (BTC) options trading on Jan. 11.

FTX CEO Sam Bankman-Fried announced in a tweet yesterday that options were listed on the trading platform. Furthermore, later the same day he also claimed that options trading volume on the exchange reached $1 million in about 2 hours.

[fillippone]

Finally CME released a statement on Bitcoin Options:

Options on Bitcoin futures are now live
A new way to manage bitcoin exposure is here

Options on Bitcoin futures are now available to trade on CME Globex, providing a new way for traders to diversify their trading strategy and manage bitcoin exposure.

Based on actively traded Bitcoin futures, our new contract offers a cost-efficient tool to hedge uncertain markets.

Bitcoin options at a glance:

Regulated Reference Rate
Track to the regulated and robust CME CF Bitcoin Reference Rate

Counterparty risk mitigation
Reduce counterparty default risk through CME Clearing

Greater capital efficiency
Save on potential margin offsets between Bitcoin futures and options

Limited-time fee discount
Effective through February 29, exchange fees for options on Bitcoin futures will be discounted by 50%. View fee schedule.

Learn more about options on Bitcoin futures, including Frequently Asked Questions and contract specifications.

Teey also released a quite interesting video:

Trader's Edge video: options on Bitcoin futures
Join Dave Lerman as he walks through the highlights of the Bitcoin options contract, the importance of volatility, and the factors behind the success of the underlying Bitcoin futures in 2019.

Trader's Edge: Options on Bitcoin Futures
9 Jan 2020 By Dave Lerman Topics: General Education
Join Dave Lerman as he begins 2020 with a new Trader's Edge video, covering the January 13th launch of Bitcoin options.

This nine minute video covers:

The factors behind the success of the underlying bitcoin futures in 2019
Options Contract Highlights
How to use the QuikStrike tool for analysis of bitcoin options
The importance of volatility with options on bitcoin

Watch it here: Trader's Edge: Options on Bitcoin Futures

[fillippone]

Quite a successful start for Bitcoin options trading at the CME:


CME Bitcoin Options Trade $2.3M in Debut, BTC Price Hits 2-Month High

Bitcoin (BTC) futures options from CME Group saw volumes in excess of $2.3 million on the product’s first day of public trading, the company has confirmed.

Data from CME’s official website confirmed the successful rollout on Jan. 13, which began as scheduled and ultimately saw 55 contracts change hands.

On an andedoctical record, there are the structures traded according to skew:

 

Looks like 55 contracts went through on CME's BTC Options first day of trading, approx. $2.3mln notional.

100% were Calls.

Source: CME (preliminary estimates)

https://twitter.com/skewdotcom/status/1216867057670795267?s=21

[Saint-loup]

LOL someone really bought 250$ a call for $10 000 in february?  

I don't understand the volumes of the order book. It's for the bids and the asks? So when they write "1" it means there is only one bid or ask for this call...  

PS: In fact these trades represent only the OTC trades/Privately Negotiated Trades(PNT) according to this CME table https://www.cmegroup.com/trading/equity-index/us-index/bitcoin_quotes_volume_voi.html?foi=O&optionProductId=8875#tradeDate=20200113

[fillippone]

LOL someone really bought 250$ a call for $10 000 in february?  

Exactely.
65.20% implied vol. Not really high actually. Today volatility is even higher, so the price would have been higher (if we had the same BTC market as yesterday, being the volatility higher, the price of the ptions would have been higher too).

I don't understand the volumes of the order book. It's for the bids and the asks? So when they write "1" it means there is only one bid or ask for this call...  

PS: In fact these trades are only the Privately Negotiated Trades(PNT) according to this CME table

Well, The order book is quite thin (not to use other denigratoy terms) right now. THose are actually offers on those options, and I think that are irrelevant as market liquidity.
This for sure has pushed people wanting to test the market not to show prices on the engine, but "pre-arrange" the trade and the  have  it crossed on the exchange afterwards.

[fillippone]

Anyway apparently everyone (but Bakkt) is trading options now!

We crossed 3000BTC options volume in the last 24 hours!

We are excited for the growth of the options market in 2020, and will continue to build FTX into the best place to trade them. 

24H volume added to the top of the chart: https://ftx.com/options

https://twitter.com/FTX_Official/status/1216944833278857216?s=20


In this graph a recap of volumes:

In the last day, both
@CMEGroup
 and
@FTX_Official
, two well-known but vastly different exchanges which both offer crypto asset derivatives, launched their #Bitcoin Options product. /1

https://twitter.com/AmunAG/status/1217041230829408256?s=20




Word of caution: Options Volumes are quaite an irrelevant metric. Open Interest is a more intresting metric, and also is very easy to "manifacture" appealing metrics.

[fillippone]

Skew. com has finally added CME to their Open Interest Monitor for Bitcoin Options:
 

Just added CME to our bitcoin options open interest radar 📡

Market on aggregate has already filled the gap from the December expiry

Growing!

https://twitter.com/skewdotcom/status/1219545917671530496?s=20

This is a very useful tool to monitor market activity, far beeeter than trading volumes.
As stated in the OP is difficult to invert market trands from here thou.


Edit: Someone at cointelegraph is reading this thread:

CME Bitcoin Options Volume Doubles One Week After Launch, Hits $5.3M

Bitcoin (BTC) options from CME Group more than doubled their traded volume in the first week after going live, data shows.

According to figures supplied by the company, Bitcoin options volumes skyrocketed in the seven days since they went live on Jan. 13.

BTC futures options surge higher
As of Jan. 17, volume was 122 contracts, worth 610 BTC ($5.27 million). By comparison, on day one, volume was 55 contracts, or 275 BTC (currently worth $2.37 million).

Open interest on options stood at 219 contracts on Friday, equivalent to 1,095 BTC ($9.45 million).

[fillippone]

When I said option can lead to gains even if markets doesn’t move to in-the-money region, I was referring also to this: arbitrage.
We are still in the first days of options market making, so we can find some gems like this one:

Short on deribit for $77 + long on ftx for $41? Arbitrage anyone?

https://twitter.com/ceterispar1bus/status/1218639096853086208?s=21

What are we looking at?
The same MAR 20 18,000 Call on two different market.

On Deribit the quote is 77.29 bid to 95.48 offer.
On FTX the same options is offered at 41 USD.

The plan is then to sell the options on FTX and buy back the same option on Deribit.
Maximum size is 50.

So we sell 50 18,000 MAR20 CALLS@77 on Deribit, cashing in 3,850 USD in premium.
We also pay 41 for 50 18,000 MAR20 CALLS on FTX, paying 2,050 USD in premium.

As we bought and sold the same option, we have no open risk, but we actually cashed in 1,800 USD in profit, as premium difference.

Wonderful, isn’t it?

There are at least a couple of things to consider:

• Margins. Opening a short position (on Deribit in this case, involves an unlimited loss. So exchanges are requiring huge capital allocated as margin to cover unrealised loss. At certain levels they even could pull the trigger on loss incurring positions, I’d not properly covered by additional margins. This adds a layer of complexity, leaving us of the choice of posting more margins on the exchange (if we have enough liquidity) or immediately close the mirror position on FTX cashing in the positive payout. in this case the two positions must be closed at the same time not to incur in p&l swings (either positive or negative).  
• Expiry dates. the two options are not exactly identical. The option on Deribit it is actually a day shorter than the one on FTX. So if we take this trade to expiry we have a mismatch. In this case it is a “good” mismatch because we bought the longer option, leaving us without downside. We can either let the time pass until expiry, or even sell the option for a premium (if in the money). In the opposite case we should consider the eventual cost to close the position, buying the one day option because there, selling the longer option, would have left us with an infinite downside.  
• This trade looks good, maybe too good. Two market makers are pricing too differently the forward volatility of bitcoin and one of the two is going to be rekkt by the end of month.

Disclaimer: I am not registered on FTX, I assumed good faith of the person who posted this example and didn’t check the reality. It’s anyway a good textbook example on how to use options.

[fillippone]

Regarding the above example we can try to figure out what the above arbitrage is equivalent in terms of implied volatility.

As we can see from the figure, the Implied volatility on Deribit is quoted as the following:
BID: 89.6%
OFFER: 93.3%

The option calculation at
 http://www.option-price.com/implied-volatility.php
confirms those calculations:


(some roundings here)

On FTX instead the offfer in terms of volatility is 79.98%:

Please note there is one added day to expiry.

This means that we arbitraged almost 10% volatility spread when the bid- offer is less than 4%.
This is huge.

[VB1001]

Effect of CME Futures Options on BTC Price Depends on Halving

It shows the confidence CME has in the Bitcoin market

CME, as a multi-billion dollar derivatives company, has no incentive to push for Bitcoin options and other investment vehicles if there simply is no traction or demand from the market. As the company’s executive Tim McCourt said, CME’s Bitcoin futures market facilitated around $270 million per day:

“We’re pleased our CME Bitcoin futures have rapidly evolved over the last two years to become one of the most liquid, listed Bitcoin derivatives products in the world, averaging nearly 6,400 contracts (equivalent to 31,850 Bitcoin) traded each day in 2019.”

31,850 BTC at the current price of $8,500 is equivalent to $270 million and that is similar to the spot volume of major exchanges in the global market.

https://cointelegraph.com/news/effect-of-cme-futures-options-on-btc-price-depends-on-halving

According to CME Group, the good figures for a recent market with the participation of Bitcoin will continue to increase interest in the BTC futures and options market, since the article says that it remains to be seen whether the institutional market will influence before or after the Bitcoin value in the period of halving.

Soon the doubts will be cleared, there are 108 days left for halving.

[HabBear]

Word of caution.
Options are a very complicated topic.
I tried my best effort to explain this topic in the most simple and intuitive way.

This is an incredible overview! All of it is accurate and there's enough information here for it to be considered a course on the investment security that is "options". All of this information applies well beyond Bitcoin. With options, you can [insert specific investment here].

The first question I (and perhaps others) have is...
If we're a first time option buyer, how do we make sense of all of your knowledge to make our first move? How do we get started?

Assuming one already has their account established, I think the best option play for a first timer is to choose one direction of the price - will it go up or will it go down? And then buy 1 options contract to call or put the price (above or below) the current price, maybe with a 1 month time horizon.

Would this be a fair way to get started?

[fillippone]

<...>

Last thing I want is getting people trading options because they read this two pages.
With this post I just scratched the surface, while deeper technical topics remain uncovered (anyone fancy explanation on delta bleed and cross vega exposures?).
If you want to use options to bet your money one positive aspect is that you know how much you will lose at maximum (option premium).
I would strongly recommend start paper trading options, and only later starting buying 1 option as a bet.
Option selling or more complex structures are more advanced, and should be approached with a little bit of patience.
Same thing for some more complex trading style different from buy your option and hodl until expiry.

[fillippone]

This post is eligible for my project:

Help me translate my best posts in your Local Board

I am a strong believer in the utility of local boards.
I am lucky enough to be able to express myself in at least a couple of languages, but I know this is not the case for everyone.
A lot of users post only in the local boards because of a variety of reasons  either language or cultural barriers, lack of interest or whatever other reason.
I personally know a lot of very good users (from the italian sections mainly, for obvious reason) who doesn't post in the international sections.

I think all those users they are missing a lot of good contents posted on the international (english) section or on other boards.

If you think you can help here, just visit the thread!

[bearexin]

Option trading is not easy. I have been into it once, and that was before I discovered bitcoin. Then I used to trade with the platform that’s called Iq option and Expert option. These platforms are very popular where I live.

But, option trading is not so easy as some may think it is and you’re likely to lose a lot of money. I have even seen some people call these platforms scammers because of them losing their money in it, but it’s not that these platforms are scammers, the problem is that option is difficult, and even more difficult when you’re trading bitcoin.

[d5000]

I'm currently investigating options as a way to protect Bitcoin investors against volatility, as an alternative to sell their BTC to fiat or stablecoins (especially in volatile times). The most popular mechanism for that is a collar strategy (which was already mentioned here).

From Deribit.com data I've concluded that currently you can create a zero-cost collar (sell a call option to buy a put option) which protects you from a $500 crash while limiting your possible gains to 500$ upwards. That means, that selling a call option 500 USD above the current price, you can finance approximately a put option which protects you from the price falling 500 USD lower. (This may mean that the markets are currently undecided if the future is bullish or bearish.)

Now my question: Do current Bitcoin option platforms require you to deposit BTC if you want to sell a call option for them? For example, if I sell a call option for 1 BTC, do I have to deposit this BTC on the exchange platform to ensure I don't run away with the BTC if the BTC price goes higher than the strike price? I guess yes, or not?

What I'm looking for is ways to avoid to deposit the BTC to a custodial wallet, so I don't have to trust a centralized platform which may run away with my money. There could be ways to ensure that I (as the call option seller) cannot run away with the BTC using multisignature contracts, similar to Ethereum's "DeFi" contracts, but I don't know if Bitcoin Script allows that.

Does anybody know about such solutions? Any info is very appreciated!

[fillippone]

More and more exchanges invoved in options trading, apparetly:

Top crypto exchange Binance hints at launchig Bitcoin options trading


[img wdth=500]https://s3.cointelegraph.com/storage/uploads/view/9957c07ab28f063de5a67fd6249ab015.png[/img]

Binance’s performative social media “leak” revealed options trading support as one of the items on a “what to test” list, which included other products that have previously been officially announced, such as the Binance Card issued by Visa.

As a popular derivative that enables traders to hedge against asset price swings in either direction, an options contract offers the chance to purchase either a right to buy (a call option) or sell (a put option) a given asset at a specified “strike price.” This strike price is determined on or before the contract’s expiration date.

Quite interesting to me is that Cointelegrph stressed the "hedging" argument to explain the options trading rather than the "leveraged gambling tool" one.

[fillippone]

After a few weeks from the market crash, we can use this opportunity to learn something from it and apply the concept we learnt on the OP.

All the graphs and analysis are from skew.com, in case you are interested reproducing them for your own personal analysis.


Les'ts start from the price action:
 


On March 12th BTC USD Fell from 8,000 to 4,800 a fall of 40% in a few hours.

There were a few reasons why this happened, but I don't want to discuss those here, I want to analyse how that move impacted the options market.

First of all let's see at the historical volatility: how such a dramatic move impacted the realised volatility of BTCUSD?



Of course volatility increased.
Remember that "historical" or "realised "volatility" is the volatility observed on the market, computed using real data. It is something relating to PAST events. A market crash starts influencing Historical volatility after it happened. 
Particularly the impact was greater if we considered shot computation window: of course considering 1 month historical volatility this "jump" had a bigger impact rather than calculating the same measure over a 3 months windows, where the effect was barely noticeable. So, when we say that "Bitcoin volatility increased, we have to add a little bit of details to this statement.
For example we notice that, being almost a full month passed since the event, the 1m volatility has returned almost to his pre-crash level, while the other volatilities remain still more elevated.

Ok, what happened to the implied volatility?

Implied volatility is something that is not so easily computale quantity. You cannot (in almost every financial market) directly observe it, as you can only observe option prices. As we have seen, all other data being known, observing the option prices allows you to compute the implied volatility, inverting the pricing model.
Implied volatility is the volatility used to price the options, so it is the volatility used to price FUTURE events.
So how implied volatility reacted to market crash?



We see that before the crash the implied were "low" and when the crash happened they skyrocketed, almost doubling their value.
Market participants were caught off-guard from this movement and had to quickly readjust their prices.
Of course again, the options with shorter life span were the one who were impacted the most, as that "jump" highly impacted their their moneyness (and hence payoff) via the high gamma. Longer expiry options were also impacted, but you see the green line of options expiring in 6 months was less impacted. Market participants believe that volatility will stay somewhat elevated in the coming months, so we haven't see a complete retracement of volatility value.

So how do they compare putting together?

Looking  at a graph comparing te two kind of volatilites:



Of course we a re comparing homogeneous volatilities , computed on the same horizon: historical computed the three past moths, while the implied takes in consideration the future three months.
We see that prior to the crash both the implied and historical volatilities were "lows". In particular  implied volatility was trading at premium on historical volatility. An option buyer would have lost, hedging their position because the paid volatility would have been on average higher that the hedging volatility. So why did he paid such a premium? because he bet on the "future" volatility. where he would have actually had the opportunity to hedge.

When the market crash happened both volatilities skyrocketed, but now the situation is the opposite: the implied volatility is decreasing, while the historical is staying almost unchanged. This means that the observed shock is not priced to happen again in the future next three months. OF course the "risk" in the market is somewhat still elevated, and hence implieds are not yet returned to their previous state.

The last graph represent how the skew changed, or how are nod differently quoted puts vs calls: skew here is measured on volatility difference between the 25% delta put and the 25% delta calls.



We see this almost unchanged. I would have rather expected a widening in quotation, given the surge in absolute volatility level. Rather this is quite stable, meaning the investors haven't dramatically changed their appetite for one side or the other.
Another example of this is the Call/Put ratio, or the ratio between the two:



We see it quite erratic, but overall stable over the last weeks: sign that there aren't imbalances on the market participant's positioning. Only recently the call open interest has been surging again versus puts (it is indeed stable regarding the trading volume). This is a sign that option players are buying more calls than puts.

This also help us to demystify a view where derivatives are source of the movement. If we give a look at the combined graphs of volumes and open interest:


We see that volumes start growing AFTER the move, and the open interest at the same time actually shrink. This means that over the crash there was a closure of position, rather than a new position opening. Given the Call/Put ratio in addition one might suspects that during the crash many open long position had to be liquidated. This is consistent with reports of  high volumes, shrinking open position and falling call/put ratio.

Again DYOR while looking at those graphs, as looking at option only can be really misleading on market positioning of various players, as we totally overlook the total positioning : if we see a surge on put buying it's not necessarily tied on people betting on a market crash, but it might be longs trying to safeguard at least part of their position in case of a sudden downturn (like ray Dalio did with the infamous 100 Billion put on the S&P; he still was long the market!)

[fillippone]

Well,
skew.com made a a couple of interesting tweets about the options, almost confirming what I analysed above:

Six weeks later, bitcoin implied vol is nearly back to its pre sell-off level

https://twitter.com/skewdotcom/status/1254680478482944000?s=20

As I said in the previous message, we see volatility has returned to pre-crash values.


Another one quite interesting:

However, skew remains positive. Will this be a structural parameter change?

Remember that skew is quoted as the difference of the implied volatilities of a 25%d put and a 25% delta call
so
skew= 25%d put - 25%d call

where
25%d put = put with a strike such as the put itself has a 25% delta
25%d put = call with a strike such as the call itself has a 25% delta

Being d>50% obviously the put has a inferior strike than the call.

A positive skew means the implied volatility for puts trades at a premium of implied volatilities for the calls.
This doesn't mean the put have "more probability" to go in-the-money, this means only that when bearish moves happen, the market moves more than forecasted by a skewless model (like the standard B&S model, actually) .


SO the moral is i overlooked a little bit this information while looking at it on the previous post! I said I would have expected such a move, but I actually failed to spot it!

[kissubaby]

thanks for the informative post.

skew.com has volatility over different strike price for a month (for example May, Jun, Sept, Dec 2020 now)
but for the month of May, we have multiple expiry date, does skew uses the 29 May expiry only? or they calculate then average for other May expiry options  (15, 22, 29 May)

[fillippone]

Halving just happened, and it is having effect on many aspects on Bitcoins: of course Bitcoin supply, with obvious implications on miners profitability, difficulty and hash-rate.
The absolute novelty of this halving is the possibility, for the larger investors, to trade bitcoins in the derivatives market.
This post analyses how the derivatives market has been positioning itself before the halving. Future posts will monitor this positioning, its evolution, and the general market dynamics after the halving. I hope that we will learn something observing markets before and after this so important moment.
Notice that in this post I will focus maninly on options, and I am running a similar analysis on my future thread.


Bitcoin options are still a very illiquid instrument over regulated platforms. Cme and Bakkt have only recently launched option trading, with very little success: for the moment combined Open Interest is still below 2%. Majority of options trading happens in low-regulated venues such as Deribit. Still, we can look at what happens on those exchanges trying to learn something.



Bitcoin Options has been rising constantly since the beginning of this year, recently reaching an all time high (ATH) of one billion USD. As you can see from the above graph the huge majority is trading on  unregulated platforms, with CME and BAKKT venues barely noticeable.

The market crash in mid mark had a very important impact on market structure on a variety of aspects.
First, the relationship between historical and implied vols dramatically shifted: as before the crash implied was trading at a premium over historical, not it is very cheap. Implied volatility has basically retraced all the splike around the market crash, while the historical volatility remains somewhat elevated.



The second effect has been the change  in the shape of the smile, or the relative price of call and put. Historically the Put/Call ratio in bitcoin has always been below one. Meaning the investors are are more focused on the upside plays.



This had a consequence that the 25 delta skew was at negative terms, or that the calls were trading at premium versus the puts, being more in demand than the puts. Basically, contrary to what happens in traditional markets, nobody was pricing a crash in price and the related high volatility.



When the market crash happened, markets observed the usual inverse relationship between market price and volatility levels: they suddenly realised that puts were too cheap and started pricing again puts at premium towards call, pushing the skew positive again.



As I said, in a future post I will continue this analysis to see how halving impacted option markets.

[fillippone]

Option markets are living a period of extreme activity after the halving. If this is tied to some structural change in the option market itself, to the halving itself, or to the increased number of players, namely institutional, being active in the market is maybe too early to call, but definitely we have at least a couple of things to notice.

First of all, it is not a news the overall market activity has increased, after the halving.
In particular we observed a surge in volumes at the most prominent legacy exchange. The CME.


If you squint your eyes you can see the CME before the halving



Same story for Open Interest, where CME has added a good weight. Can you see BAKKT?

The fact that open interest has increased after the halving in every exchange, make me think it is some new player entering the market. And the fact that CME has gained so much compared to others, make me wonder that it is the institutional players starting paying with bitcoin options. This particular category of investors has the highest benefit using the CME platform, rather than a whale. Remember that CME options are traded for cash settlement, making it not the most obvious choice for he who want to have exposure to physical bitcoin, like, as we said, whales.



CME hovering around 20% on Open Interest is something that would have been unthinkable only a few months ago. Let's see if they are able to keep this momentum rolling.

If we look at what actually happened on the market, after the halving, we se that, well, the activity on the spot was quite muted, we had some spike above 10,500 suddenly rejected, but nothing that triggered further sells.
Market stabilising had his toll on realised volatilities:


Dead calm on market volatility

This situation also dragged south also implied volatilities, that started following the move grinding lower. Of course short implied were discounting excessive movements from spot at the halving, those didn't materialise, so fell more markedly.



The result is the following, where implied trades at a huge discount compared to realised.


Implied Looks cheap!

One might be tempted to buy implied vols, buy option, and dynamically hedge, cashing in the difference between the twos with the hedging activity profits.  Let's zoom out a little bit:


Implied Looks cheaper!

Even if we can appreciate the discount of implied to realised, here it's immediately clearly why is that: while implied volatility is a forward looking indicator: is is an estimate of volatility level from today to option expiration, realised volatility is a backward looking indicator, being computed on the realised movement we have observed in the past. There you understand how important is the market crash of mid may, which has raised historical volatility, but it is not priced in to happen again.

Probability of market crashes are often undervalued, actually this is the main reason why skew exists. One very interesting fact about this is how market wasn't pricing correctly market crashes, and how they reacted when it happened.

 We have seen how skew on BTC option was trading negative before the crash, this means call skew was higher than put options. Then the market crash happened, traders realised crash do happen and started buying protection against it, buying puts against calls. This continued until mid may when 25d skew (remember: difference in volatility between 25%delta puts - 25% delta calls) reached historic high around 20%.


Skew being priced flat again after being priced at 20%

This is the distribution of open interest per strike: we see the upside is very well populated, also for strikes very out-of-the-money, with tiny delta.


50K strike? Really?

The same information we had on skew is conveyed by the put/call ratio. When this ratio was high, meant puts were being bought, this raised their price and so their implied volatility. We now understand how an higher put/call ratio means higher skew. On the contrary, when this ratio began to fell, also the skew returned toward more "normal" levels.



Having a put/call ratio being not at extreme level, means interest are not exactly balanced, but they are not on an extreme distribution, meaning underlying movement.

In the end I think the fall in this ratio has been due to the explosion in open interest at CME, where the ratio is actually very skewed on the upside:


1:51 are you kidding me? Aren't you supposed to be an institutional? 

I am not saying the call buying on CME made the global put/call ratio to drop significantly, but for sure din't help it growing.

Conclusion.


We had some notable change in market structure in the last month. More institutional presence, more skew, even if lately the name of the game has been on the call side of the bet, as like before the market crash: is it possible the lesson was not learned by the traders?

[darewaller]

I think I’m lost here wait... Options, like you mean options trading, the same thing we can do with IqOption and Expertoption?
Or is it a different something when it’s Bakkt and Deribit that we are talking about here . I am quite confused because I can remember that IqOption is also called options trading and they have people trading bitcoin there for as low as $10.

So, how comes are you saying that there are no other platforms where people can trade options apart from Deribit and that only whales do that? Unless Bitcoin option is completely different from what I know? Sorry, I’m quite confused, maybe cause I can’t comprehend the big article you wrote. If you don’t mind summarizing it an easy way.

[Vispilio]

I think I’m lost here wait... Options, like you mean options trading, the same thing we can do with IqOption and Expertoption?
Or is it a different something when it’s Bakkt and Deribit that we are talking about here . I am quite confused because I can remember that IqOption is also called options trading and they have people trading bitcoin there for as low as $10.

So, how comes are you saying that there are no other platforms where people can trade options apart from Deribit and that only whales do that? Unless Bitcoin option is completely different from what I know? Sorry, I’m quite confused, maybe cause I can’t comprehend the big article you wrote. If you don’t mind summarizing it an easy way.

It used to be the case that very few platforms offered Bitcoin options, now there are more names, although the greatest crypto option volume continues to be traded on Deribit (disregarding some OTC deals),

here are 2 current charts from analytics.skew.com for more clarity:

[fillippone]

Just a little update from skew.com, as the next option expiry, on Jun 26 is going to be huge.

Open interest is at historical high, nearly 1.8 billions, by far the highest in BTC options history.
CME took a decent share of it: 25% is huge.

To put that in relative terms, bear in mind that currently BTC options are roughly 1% of all BTC derivatives, while this percentage is almost 60% in traditional markets.

	Open Interest is at historical high. Care the vertical axis: deribit his bigger than it appears	CME at 25% seemed impossible until a few weeks ago

Most of the Open interest is in the front month, as usual, and the upside is playing the bigger part. There is no strike particularly dominant, and OI is well spread in the 11,000-16,000 region.

	As usual, most of the Open Interest is on the front month. Back months appear to be bigger than usual too.	Strike distribution is calling for an upside move

One thing to notice is that open interest tells us that there is an open position in the market, but nothing on which side the position is open.
A contract is open both if it is bought and if it is sold.
So the Open Interest tells us where the "bulk of the contracts" is, but it doesn't tell us the direction, that is, if there have been more "buyers" or more sellers ".
Well, but if one has bought the other has sold, you will say.
Well, sure, but the two "sides" of the trade are often made up of two "players", with a totally different style of play.

End users are interested in where the underlying expires, "win" if the option is in-the-money and "lose" if it is out-of-the-money, and therefore have an interest in "manipulating" the market to get them to the area where they profit.
Instead, market makers are more interested in how the underlying expires: with what volatility, how it moved before, etc. They tend to have no interest in where the option closes, because they operate with a different logic and, so to speak, "neutral" with respect to the direction of the market.
So depending on whether end users have "bought" or "sold" a particular strike, the behavior, especially near it, can be very different.

In particular, it seems that many call spreads have been made, or call purchases, we assume the closest strikes, financed by selling calls with higher strikes.
It is now too short to see too many strikes "go through" (even if, with BTC can never know), but if the former were bought and the others sold, then the behavior in those regions could be very different!

So we will look at this expiry with great interest: options are a tool used by many different investors for a variety of reasons: fund managers,  fast money traders or whale, for example, can use options to hedge, yield enhanchment or punting the market.

As the market gain liquidity, these instruments will be more widely used, the gap to be closed with traditional market is huge, so the potential growth is enormous.

[Vispilio]

Just a little update from skew.com, as the next option expiry, on Jun 26 is going to be huge.

Open interest is at historical high, nearly 1.8 billions, by far the highest in BTC options history.
CME took a decent share of it: 25% is huge.

To put that in relative terms, bear in mind that currently BTC options are roughly 1% of all BTC derivatives, while this percentage is almost 60% in traditional markets.

...

One thing to notice is that open interest tells us that there is an open position in the market, but nothing on which side the position is open.
A contract is open both if it is bought and if it is sold.
So the Open Interest tells us where the "bulk of the contracts" is, but it doesn't tell us the direction, that is, if there have been more "buyers" or more sellers ".
Well, but if one has bought the other has sold, you will say.
Well, sure, but the two "sides" of the trade are often made up of two "players", with a totally different style of play.

...

Great update, if open interest is predominant in the 10-16k BTC price range, the traditional interpretation is to conclude that the market sentiment is slightly bullish.

Most option contracts are traded out of the money, by virtue of the intrinsic philosophy of most options strategies, so 10-16k high open interest almost certainly means high concentration of OTM call options.

Most of these, I guarantee, are either initiated as naked long call options (and delta long spreads), or Long BTC hedged by short call option premium (or various combo strategies derived from similar reasoning which we might get into later if there is more interest on this thread), thus the currently increasing volume in the BTC option markets is indicative of bullish sentiment.

[fillippone]

Great update, if open interest is predominant in the 10-16k BTC price range, the traditional interpretation is to conclude that the market sentiment is slightly bullish.

<...>

Agree, you are right, slightly bullish is the best definition of current market sentiment.
One thing that I would further highlight from your message is that long call spreads, which are for sure a great part of this total OI, aren't detected, as both options (one bought and one sold) are contributing increasing the OI.
I am not sure a covered call writing (shorting a call to cash the premium, while hodling the underlying) is a bullish strategy, rather than one pointing to a stability in price (given the long delta, short vega exposure). But this is very technical, it really depends on which option you sold.

Secondly, it is true that the option plays are bullish, but market makers learnt, after the March crash, how to price the puts.

	Skew is a measure of the difference, in volatility, of Puts - Calls

We see the skew remains elevated, so there is a pressure to buy calls protecting from a downward leg.

Thirdly, given the increase in positions from CME, probably more than a few market makers used Deribit to hedge their positions, "double counting" various structures between the two markets.

[fillippone]

I wanted to update this thread for the last few days, but I procrastinated due to holiday seasons.
But when I read this news I decided I couldn't stay silent:

No One Has Traded Bitcoin Options on Bakkt for Over a Month: Deribit Continues to Dominate

• Open interest for the exchange’s options market has suffered complete inactivity before, but the current 38-day streak dwarfs other periods.
• Bakkt's options volume has also dropped to $0 since April 23, according to Skew.
• Bakkt declined to comment when contacted by CoinDesk.

In the article there are sad picture like those:

	BAKKT Open Interest	BAKKT Volume Tracker

Going to the source I haven't been able to exactly reproduce the graph, but the Open Interest one is quite similar:



One could think context is not exactly the best to open new positions on options given the low volatility that is affecting every asset class: buying options in such a context would imply burning the time value and see the P&L bleeding every day.
For example this is the volatility for Bitcoin, SPX and XAU recently observed:



Skew confirm that picture: we see 1M historical volatility hovering around 30%, and feeling the gravity as  BTC is lacking movement.



Also Implied have been dragging south, even if they look resilient to me:



Of course shorter expires are getting sold more aggressively, but intermediate expires look quite resilient to me.

But can this narrative be confirmed by other exchanges?

In fact, contrary to what happens looking at Bakkt, OI and Volumes look quite solid:

	Open Interest across various exchanges	Reported Volume at various exchanges

I think market might bee too complacent with current regime, and could move on either direction.
For sure currently markets are pricing a move into the downside less likely, as collars are again on the cheap side:



Please remember that in March, at the time of the market crash, collar were paid negatives, this means that the downside protection was a very neglected purchase.
 

[fillippone]

Interesting times in the Options space after the PUMP.
Price moved up sharply in the last weeks, and this had some impact in the Options World.

First a recognition of Open Interest and Volume across the exchanges:

	Open Interest. Please Note Axis starts at 500 $ mios: the red part is way greater than appears.	Trading Volume.

As soon as the underlying moved and broke to significative resistances, both open interest and volumes moved also up. Open interest has been consistently grinding up during the last months, this is a very important sign of maturation for BTC markets, where a more established derivatives market can help the underlying price discovery activity. Also means options market are efficient enough to help market participants taking positions.  This is very bullish long term: more efficient and "complete" markets tend to reduce volatility, and erratic price movement, as in more developed markets there are more than one category of investors involved, with a variety of objectives and time-horizons. CME, the main "legacy" market, still has a decent percentage of Open Interest, sign of more traditional investors taking positions in these instruments. 

Volume  had record values on July 27, also because there was an option expiry on that date, so a lot of players had to "roll" their exposures on the new front contract, closing expiring options to open new ones on the first contract (for this reason there isn't a corresponding spike on the open interest graph). 

Now, looking at the strikes, how the upmove affected the strike involved in trading?

	Open Interest distribution over the various strikes.	Put/Call Ratio. Note the time scale:longer to make visible the cycles.

The stike mapping is quite well distributed, with not excessive imbalances that could cause quick movements when approached due to the hedging activity of market makers (this being highly dependent on their long or short position).
Regarding Put/Call ratio we can differentiate a bit: the volume Put/Call ratio is stable at 0.86. This is an highly volatile numbers, but we do observe a constant mean. This implies that for trading options scalpers actually prefer using Calls to speculate instead of Puts. Of course this means also they close the day hedged without open positions and hence without registering the open interest.
On the contrary, Put/call Ratio on the open Interest, takes into account the more "structural" positioning of players with longer time horizons. Here we see the Put/Call ratio spiking toward high levels of 0.7 This means the community is actively buying puts, like they did just after the March Market crash. So they are probably going trying to hedge themselves against a correction of the price, maybe investing some of their profits(no proofs on this).
What it strikes me is the constant failure for the market to positively price the put side: the market is so skewed to the upside, the buyers cannot lift the put side skew to the premium usually associated with such a volatile asset:

	Skew fails to stay positively priced.

Probably if price fails to break this levels, we could see more aggressive put buying, but I always wonder why these kind of movements are never anticipated by rational investors, who should price in a spot/vol relationship.

[VB1001]

Bitcoin price volatility expected as 47% of BTC options expire next Friday

The open interest on Bitcoin (BTC) options is just 5% short of their all-time high, but nearly half of this amount will be terminated in the upcoming September expiry.
Although the current $1.9 billion worth of options signal that the market is healthy, it’s still unusual to see such heavy concentration on short-term options.
By itself, the current figures should not be deemed bullish nor bearish but a decently sized options open interest and liquidity is needed to allow larger players to participate in such markets.

https://cointelegraph.com/news/bitcoin-price-volatility-expected-as-47-of-btc-options-expire-next-friday

Let's see how BTC works out the move throughout the week.

[JayJuanGee]

Bitcoin price volatility expected as 47% of BTC options expire next Friday

The open interest on Bitcoin (BTC) options is just 5% short of their all-time high, but nearly half of this amount will be terminated in the upcoming September expiry.
Although the current $1.9 billion worth of options signal that the market is healthy, it’s still unusual to see such heavy concentration on short-term options.
By itself, the current figures should not be deemed bullish nor bearish but a decently sized options open interest and liquidity is needed to allow larger players to participate in such markets.

https://cointelegraph.com/news/bitcoin-price-volatility-expected-as-47-of-btc-options-expire-next-friday

Let's see how BTC works out the move throughout the week.

The little snip that you provided, VB1001, mentions that the options largely provide a means for BIGGER players to get into BTC, but from the underlying, neither a bullish nor bearish determination can be assessed. 

You, VB1001, seem also to be guarded in terms of trying to figure out if there might be a direction one way or another that might be incentivized by the end of the week expiration of the outstanding options.  I suppose that there might be some BIGGER players that might want to attempt to play the BTC market and use options as one of their tools to attempt to play the market, but even the recent statement from Michael Slayor and his purchase of more than 38k BTC in the past several weeks, his assessment was that he was surprised that even his relatively large purchase of $425million in BTC in a relatively short period of time was able to be accomplished without a lot of BTC price slippage.... which surely is a sign that BTC prices are likely requiring more and more commitment of capital in order to even attempt to manipulate the prices whether we are referring to attempts to take advantage of options bets or some other tool that some BIGGER players might attempt to deploy to make money based on BTC volatility or possible abilities to cause BTC to be more volatile than some traditional (longer history) asset classes.

I am not really attempting to proclaim any kind of knowledge either regarding how option expiration dates might play into possible BTC price movements, but surely it should not hurt to have knowledge of this kind of data for those nerds, like yours truly, who spend a decent amount of time each day looking at whether BTC prices have gone up or down - over various snapshot periods of time. 

[VB1001]

I suppose that there might be some BIGGER players that might want to attempt to play the BTC market and use options as one of their tools to attempt to play the market, but even the recent statement from Michael Slayor and his purchase of more than 38k BTC in the past several weeks, his assessment was that he was surprised that even his relatively large purchase of $425million in BTC in a relatively short period of time was able to be accomplished without a lot of BTC price slippage.... which surely is a sign that BTC prices are likely requiring more and more commitment of capital in order to even attempt to manipulate the prices

I think the way Saylor made the purchase helped the market not to make any sudden movements in the price.

To acquire 16,796 BTC (disclosed  9/14/20), we traded continuously 74 hours, executing 88,617 trades ~0.19 BTC each 3 seconds. ~$39,414 in BTC per minute, but at all times we were ready to purchase $30-50 million in a few seconds if we got lucky with a 1-2% downward spike.

https://twitter.com/michael_saylor/status/1306940165160656897

[JayJuanGee]

I suppose that there might be some BIGGER players that might want to attempt to play the BTC market and use options as one of their tools to attempt to play the market, but even the recent statement from Michael Slayor and his purchase of more than 38k BTC in the past several weeks, his assessment was that he was surprised that even his relatively large purchase of $425million in BTC in a relatively short period of time was able to be accomplished without a lot of BTC price slippage.... which surely is a sign that BTC prices are likely requiring more and more commitment of capital in order to even attempt to manipulate the prices

I think the way Saylor made the purchase helped the market not to make any sudden movements in the price.

To acquire 16,796 BTC (disclosed  9/14/20), we traded continuously 74 hours, executing 88,617 trades ~0.19 BTC each 3 seconds. ~$39,414 in BTC per minute, but at all times we were ready to purchase $30-50 million in a few seconds if we got lucky with a 1-2% downward spike.

https://twitter.com/michael_saylor/status/1306940165160656897

Of course, anyone who intended to buy on various exchanges (rather than OTC), as far as we know, would want to buy in such a way to attempt to both minimize upward price slippage and also to take advantage of any BTC price dips that might be inclined to take place during their BTC buying period.

Some might also argue that any large entity adding that quantity of BTC to their investment portfolio would be serving as a kind of BTC price support - which sort of implies that the BTC price may have fallen a bit more, absent such additional buying support.  Surely, the price support theory is considerably speculative since we have difficulties, in the real world, to really compare the difference between what would have happened to the BTC price absent the more than 38k BTC accumulation that Microstrategy employed.

[fillippone]

Bitcoin price volatility expected as 47% of BTC options expire next Friday

The open interest on Bitcoin (BTC) options is just 5% short of their all-time high, but nearly half of this amount will be terminated in the upcoming September expiry.
Although the current $1.9 billion worth of options signal that the market is healthy, it’s still unusual to see such heavy concentration on short-term options.
By itself, the current figures should not be deemed bullish nor bearish but a decently sized options open interest and liquidity is needed to allow larger players to participate in such markets.

https://cointelegraph.com/news/bitcoin-price-volatility-expected-as-47-of-btc-options-expire-next-friday

Let's see how BTC works out the move throughout the week.

The little snip that you provided, VB1001, mentions that the options largely provide a means for BIGGER players to get into BTC, but from the underlying, neither a bullish nor bearish determination can be assessed. 
<...>

Reading the supposed market direction from Metrics like Open interest, or strike distribution or some other “static” data from options market has always been an art well beyond my understanding of such market.

There is such a variety of players, trading styles or trade rationale that could produce exactly the same outcome on such metrics, that I always giggle when someone try to sell you a “recipe” to navigate trough option expiry.

As @VB1001 and @JayJuanGee pointed out, skepticism is a must in these cases, as junping to conclusion coul put on the wrong side of the market on expiration day.

[fillippone]

In the past days, Greg Maxwell has been interviewed on the forum.
You can read the full interview here , it is really an interesting interview, perhaps the most interesting read so far, I strongly recommend reading the whole of it.

As far as this thread is concerned, there is a special passage that is relevant:

I trade options on Bitcoin at LedgerX with a portion of my stash.  Most of my trading could be characterised as selling moon insurance (deep out of the money calls) and crash insurance (deep out of the money puts).  For the most part, the activity hedges my substantial Bitcoin exposure-- and it more than covers all of my living expenses which gives me peace of mind.  I've averaged a ~20%/yr return on investment (not including Bitcoin's gain in value, of course) since I opened the account in December 2017.

I think more people trading Bitcoin should be interested in options: They can be used to better reflect the kinds of opinions people have about Bitcoin's price and can be shaped to better match people's risk tolerance.  For people who want more risk options (esp physically delivered ones like LedgerX) can be a lot safer than the leveraged Bitcoin products traded elsewhere.  They can also be more tax efficient.

In the following post I will try to analyse Greg's strategy from a technical point of view.
For the moment I will abstain from the "tax efficient part" as it has a lot to do about very specific details of Greg's position I don' know and I can't guess about.

Maxwell's strategy is called "short strangle": that is the sale ("go short" means to sell something) of a "strangle" that is an option strategy composed of a put option and a a call option with the same maturity on the same underlying.

Example:

Code:

Short a 20% delta  Six months Strangle

I tried to create this strategy using Deribit Options, as he referenced them on the thread. He never mentioned 20% delta or six months time horizon, these  are just working hypothesis.

So, trying to find out the options as close as possibile to the desired delta level I found those two:


Sell 1 44,000 CALL  Strike K=44,000 expiry 25 Jun 2021 for 0.0594 BTC
Sell 1 14,000 PUT   Strike K=14,000 expiry 25 Jun 2021 for 0.0681 BTC

This means cashing in 0.1276 between 14,000 and 44,000 being exposed to unlimited losses on the extreme movements.
Bear in mind that currently the BTC Jun futures trades at 20,290

The position details are the following:

	Pic.1 Details of the two options in Greg Portfolio with details of the position's greeks.

Looking at the summary we see, from left to right the description of the options, then the "short" label means we sold both of them, in 1 unit each. Bear in mind that usually strangle strategy implies selling the call and the put in the same amount. Selling more than one options would have changed the absolute size of the final payoff, but it wouldn't have changed the level of "discontinuities" in the payoff (the strikes) and of the breakeven points (that are functions of the cashed in premiums) . This is very important. Going further to the right we see the IV column, this represents the "Implied Volatility" of the options, or the level we have to put in the model to obtain the current market price. This is the breakeven volatility: if the realised volatility, at the end of the trade, will be lower than that, then the trade will be in the profit, while if the realised volatility will be higher, the trade will end up in a loss [1].
Next column we have the delta of the options. I choose those two options to have a delta as more close to 20% as possible (being on a listed market, the choice for strikes is limited). The put has a negative delta, i.e. the price of the put increases when BTC price falls, while the call has a positive delta, i.e. the price of the call increases when the price of BTC goes up. If we sum up the two deltas we see the result is a tiny negative number: this means that our strategy is, for the moment, quite neutral about the direction of the price.
Another way of looking at this is the green line in the Table 2. That is the value of the strategy today: we see that close to the current market level the P&L is quite flat around zero (the positive premium cashed in is equal to the negative value of the options we sold).

The last three columns are other greeks of the strategy:

• Gamma: the rate of change of delta in case of underlying movements. Note that both of them are negative because we sold both options)
• Theta : the sensitivity of the price of the options to the time. We sold both options, so Theta is positive: every day we cat closer to the option expiry, so it is more difficult to the underlying to move in any directions. This means the "time value" of the options decreases and the residual value of the option is the intrinsic value.
• Vega: the sensitivity of the price of the options to change in implied volatility. Again both of them are negative because we sold both options. If implied volatility rises then both options premium rises trough an increase in the "time value" part of the option. Thus the value of the sold options increases, but the cashed premium stays the same, putting the strategy P&L at risk.

	Pic.2 The payoff of the strategy at the end of the trade (red Line) and the P&L at inception (green line). During the life of the trade the green line morphs into the red line trough the collapse in the time value of the strategy.

If we look at the graph of the options we see that at the expiry Greg collects the full 0.1276 premium if BTC is between the two strikes.
If BTC moves away from the strike on the outside, the strategy stats losing money, initially the P&L erodes the collected premium (the final P&L is still positive), but as BTC moves away from the strike, the payoff gradually worsens, at the breakeven points gets zero, then it becomes more and more negative. On the left the loss is limited to the fact that BTC price is floored at Zero, but on the upside the maximum loss is technically infinite, as BTC can go to the moon.


The astute reader could argue: if we sold one option per side, why is the strategy not symmetrical, and the slopes of the p&L are so different on the two sides? Well the point is that the payoff of the options is in BTC, but the graph is in dollars. So if we had the possibility to look at that graph in Bitcoin (both the x-axis and the P&L axis) the two side of the plot would be symmetrical, but as we are looking at the dollar value of that BTC we see that graph tilted to take into account the different BTCUSD exchange rate.

Trying not to get too technical, in practice Greg sells options that are far from being "activated" and collects the prize. On average, nothing happens, and so he collects this sum and nothing happens. On average Greg's strategy produce a small gain, but it occasionally will produce big losses. Greg is exposed, consciously, I guess, to big swing in the underlying movement.
If the price rises a lot, his calls end up in the money, so exercise, and Greg is forced to sell bitcoin at a price lower than that of the market at that moment.
Alternatively, if the price drops a lot, his puts end up in-the-money, so get exercised, and Greg is forced to buy bitcoin at a price higher than that of the market at that moment.

Obviously, in a strangle, only one of the two options will necessarily be exercised, while the other will necessarily be abandoned.

Greg knows N. Taleb as he read "Fooled by randomness" by N.Taleb (I spotted that book on his bookshelf, can you find it? Solution: last right bookcase, third shelf from the bottom, fourth book from the right), so he knows he's betting against the "black swans".

I guess he took this approach consciously, as probably he's not covering all his coins stash with options, and he needs some regular cash flows to pay his expenses. If he gets exercised on the upside, he's actually losing money in the single trade, but he's probably also making huge money on the whole of his position.


Personally I do not like this strategy, because a certain maximum result (the sum and the premiums collected) is contrasted by an unlimited maximum loss in case the price goes to the moon or crashes to zero.
Obviously while we see he could stand quite well a loss when price moons, I guess the same is not true on the downside. When price get to zero, he's suffering not only for the reduction on the value of his main stash, but also he's losing money the derivatives side of the trade, where Greg inflicts himself an additional punishment of going to buy Bitcoin at a higher price than the market).

What I would do, being a risk adverse, is buying the put, instead of selling if, maybe a little bit further OTM, just to reduce the premium. Of course the gain in "normal times" would be reduced, but at least I would have a downside protection during adverse times. It would be a poor hedge, as we said this trade don't cover all the stash, but at least I wouldn't be adding pain to the bleeding. Or more simply I would only sell the call.

Just a couple of final remarks:

• Deribit options are European Options. This means they can be exercised only at the maturity of the options. This doesn't mean they need to be held until maturity. Usually exercising an option before the maturity (in case of American style exercise) is sub optimal, as you give up the whole time value, a the exercise locks in only the intrinsic value. So a better way is just selling the options in the markets, which allows you to cash-in also the time value.
• We looked at those strategies and we analysed trough an "expiry trade". This means that we didn't take into consideration any corrective actions by Greg during the life of the trade. Setting up this strategy, forgetting about it for six months, and then hitting F9 at expiry to see the outcome is not the best way to do so. There are an infinite combination of possibilities between "continuous" hedging (the one put in place by market makers") and "static hedging" ("buy and hold"). Greg potentially can take a variety of action in case some "adverse" scenario is going to materialise: he could hedge the direction of the market using the underlying BTC futures, he can roll up the strike of the strangle, buying back the options and selling a further out of the money strike, or he could even roll to a calendar spread buying his options and selling a same strike with longer maturity one, or any combination of those.
• The hedging possibilities are endless, there is not a "better" or "worse" strategy, as it really depends on personal risk appetite, time horizon, global portfolio analysis, tax/legal/accounting constraints etc. This post was made out for pure intellectual curiosity and as an academic exercise, of course it is not any kind of investment recommendation.

[Karartma1]

I wish I could understand this better but I am a total fool within this field and I would not even know where to start! I will try to re-read gmaxwell's interview and re-read again your post because I feel so stupid that I can't get anywhere around it. Thank you very much for this detailed post, you must have dedicated quite some time to it.

[fillippone]

I wish I could understand this better but I am a total fool within this field and I would not even know where to start! I will try to re-read gmaxwell's interview and re-read again your post because I feel so stupid that I can't get anywhere around it. Thank you very much for this detailed post, you must have dedicated quite some time to it.

It is not about being stupid or intelligent. It’s about studying certain topics. I dedicated many years of my life to these topics, and now I think I can manage those instruments quite well. It took many years, so don’t think you are stupid because you don’t understand this at the first read.
Actually, a stupid person would think they have learned “all they wanted to know about option” from this thread!

[gmaxwell]

I think your post might make a better case against using deribit.   I use LedgerX -- I don't use deribit because it's not physically delivered, doesn't allow US customers, etc.

If he gets exercised on the upside, he's actually losing money in the single trade, but he's probably also making huge money on the whole of his position.

This highlights why its not very useful to consider a position without its hedges or what its hedging. E.g. the isolated analysis has you characterize the loss as  unlimited-- but for covered positions (which are the only kind of short you can get into on LedgerX) the worst case loss is the value of the collateral minus the premiums you received, which is a very different story.  If you were going to hold the collateral for the duration regardless then no loss is possible.

The positions I take are a bit wider than you assume-- $7.5k, 5k, or 2k strikes on the put side (which I try to get a premium comparable to a 15-20%/yr on the collateral, depending on the strike/date), and I'm getting more on the call side than you expected:  E.g. recent trades have me receiving  $2,699/BTC for JUN2021 50k, $6,985/BTC for DEC2021 35k,  and $4920/BTC for DEC2021 50K, to give some examples.

So lets look at the value at expiration of a position consisting of {2 BTC, -1BTC 35k DEC2021 call, -1BTC 5k DEC2021 put} using some recent trade prices, and compare that to just hodl the same 2 BTC:



In exchange for diminished returns over a BTC price of $42,866, the position gets increased value at all lower prices.

Another way to look at is is in terms of ratios of dollar values:



So under a hypothetical crash to $2,866 the position is twice as valuable in dollar terms compared to hodl. If Bitcoin crashed to nothing the position would be worth $2867.  Back when I acquired most of my Bitcoin $1,433/BTC would have been considered a fantasy moon price, its a price below the ATH up until May 2017.

At the ATH price of (say) $21,000/BTC,  the position is 18% better off than hodl and even at $36,953/BTC the position is a respectable 8% ahead of hodl.  True, at a super-moon price of $500k/BTC the position is only worth 54% of HODL,  but it's still worth 14.28 times its current value at that price.

Of course, in the crash situation I'd be better off selling now but we don't know the future.  I think crashes and supermoons are certainly possible, but I also don't consider either to be extremely likely in the next year.

It's also worth considering in BTC terms:



These trades help avoid regret:   If the BTC price crashes the seller (me) at least locked in some income (or, alternatively, gets a lot more BTC),  while if the price stays flat-ish this position gets a ~20%/yr return and the seller doesn't need to regret not selling BTC and investing the funds elsewhere. In the moon case the trade limits the returns but there are only so many lambos a person can need (in my case I need exactly zero lambos, but you get the point).  

I'm pretty bullish on the future Bitcoin price, but I'm also not in dire need of astronomical amounts of wealth.  I find it generally more valuable to me to mitigate risk.

Even under the most aggressive model of mid term future prices that I find vaguely justifiable-- assuming the future price is a random walk with the same distribution as the returns since 2013 that 35k call is <50% likely to get assigned. Under a more conservative model -- using the derivative of delta at the options premium to get the assignment odds under black-scholes

• , the 35k call 1yr call is about 12.5% likely to get assigned.   Assuming the price is flat, this trade just yields a extremely respectable 20%/yr from selling volatility (I say extremely because half the btc isn't even 'at risk' when reasoning from the perspective of a hyperbitconized world).

There are a lot of people who seek to profit off volatility in other ways, e.g. day trading the bitcoin spot market.  But the fees and taxes from doing that can be considerable and the risk is substantial.

Of course there is also custodial risk, though this position only needs to expose half its Bitcoin to third party custody. I've also ignored the tax implications.  But I think whatever your tolerance for risk and/or ideas about the future values of Bitcoin say, there is usually a way to use options to get an outcome that better meets your needs.

• And yes, Talib would point out that black-scholes assumption of normal returns doesn't have fat tails-- while market history including Bitcoin history does (Bitcoin historical returns are heavily skewed and have mac-truck sized tails).

so he knows he's betting against the "black swans".

The way I see it, owning Bitcoin on an ongoing basis is a massive bet for and against a collection of black swans: Owning Bitcoin is a bet for BTC becoming a world currency, fiat hyperinflation, widespread distrust in institutions/monetary policy, and massive globalization of economies (with concordant lack of functional legal process across borders, making irreversible and machine arbitrated transactions more valuable).  Owning Bitcoin is also a bet against technical/economic fault destroying Bitcoin's viability, effective adverse regulation denying people access to Bitcoin, Bitcoin businesses being so corrupt or incompetent that they scare everyone away, the collapse of technological society, or Bitcoin not being the solution to the prior list of pro-bitcoin black swans that people adopt. I believe that the current price substantially reflects a balance between these considerations.

In general I share the view that these black swans-- both the positive and negative ones-- are credible but at the same time I also believe many people over-estimate their likelihood especially in the short to mid term.  So by owning Bitcoin (as well as non-cryptocurrency assets) and selling the BTC/USD return tails I seek to turn the the difference between my beliefs and more extreme beliefs into profit, along with locking in some of those black swan gains now when they can do me some good rather than in some hypothetical future that I might not even live to see. Simultaneously,  I believe the marginal value of additional wealth isn't constant-- and so I think there is the potential for mutually beneficial trade even with someone who shares a similar perspective on the distribution of future prices but just has a different risk preference than I do.


Aside, I did some image processing magic and managed to make a 'flatter' projection of my bookshelves.

[GeorgeJohn]

These particular post really boost the level of my IQ, everything discussing here just look's like film, I don't really know that someone can spend time in preparing such ambiguous and interesting topic that attract attention, how I wish I can be like op via research and construction of topic i won't complain again, infant in recapitulation I so much love these topic because i noticed that is very educating even when you lost attention towards it.

[Hueristic]

...I don't use deribit because it's not physically delivered,...

People disregard this as if it means nothing when in fact it means everything!

[gmaxwell]

...I don't use deribit because it's not physically delivered,...

People disregard this as if it means nothing when in fact it means everything!

I agree, this deserves more elaboration.  Options exist in "physically delivered" and "cash settled" form.

Physically delivered works basically like what you would imagine an option to work: To write a call on a Bitcoin someone posts a Bitcoin and writes a contract.  At maturity, whomever owns the contract can opt to pay the strike and get the Bitcoin.  (Same thing for selling calls, but they'd post dollars and if it gets assigned the contract holder pays the bitcoin and gets the dollars).

With cash settlement, the covered Bitcoin may not actually exist, and at expiration if the option is in the money the seller will pay the buyer the difference between the strike and the price.

Physically delivered avoids a lot of complexity and risk.

Cash settled is essentially a side bet on the price of Bitcoin.  With cash settlement you need a "the price", which means you need an index.  As a seller of a cash settled option you can potentially get screwed if the index prices aren't reliable-- e.g. someone could buy an OTM option right before expiration, then at moderate cost manipulate the index and force you to pay them a bunch.  As a buyer of cash settled options the assets to make good on them may simply not exist in the event of a black swan that turns your position extremely valuable-- potentially resulting in a cascading failure of the exchange.

To protect against that risk any exchange engaging in cash settlement will need to have extensive exposure management-- this will automatically force traders to post additional balance if their positions get out of wack.  They'll also need to auto-liquidate positions-- potentially profitable ones too.  Kind of ironic that when your predictions are right and are moving in your favor you might be liquidated to protect the platform exposure.  Platform risk management to users is inherently fairly opaque, traders should be accounting for it in their prices but it's not clear how they can do so rationally without a great deal more information.  Any kind of auto-liquidation also disrupts the potential value proposition of options, since part of that value is that you can make a trade once then ride out volatility along the way to the expiration date.

So why would anyone ever want to touch cash settled?  There are a couple reasons:

One is that the settlement process of a physically delivered asset can be inefficient.  Say you are super bullish bitcoin-- you bought a bunch of calls, and they're about to expire ITM.  Great, but now you need to get a bunch of USD to fund their execution, but you don't have any because you're super bullish on Bitcoin!  You can, instead, trade out of the position but the market may not be liquid enough to do this at a good price.   In mature markets this is mostly a solved problem:  For a modest fee retail brokers will loan you the cash you need for whatever milliseconds it takes to receive the shares and sell them on the spot market. But this is not solved for the Bitcoin options market yet.

Another is that regulatory complications make it harder for exchanges to handle USD at all.  In a cash-settled options market you can use BTC as your cash, so you can make a platform that is 100% all Bitcoin, no USD (It can even be 100% all bitcoin even when it has options on altcoin/btc).  This is also a convenience for customers that don't want USD exposure.

Another reason is that since cash settled platforms are inherently having people trade on margin there is no fundamental problem with customers keeping custody of the coins covering their positions in their own wallets. But the flip side of this is that the platform can't guarantee delivery.

Cryptocurrency markets and options based on them are already volatile enough that I'm dubious of the belief that market efficiency requires a lot of leverage on these positions.

Unfortunately, by their very nature these side bet markets easily generate a lot more volume than physically delivered markets, so to some extent they also may be denying air to the more robust alternatives.

Personally, I think cash settled is fraught with long tail systemic risk --  I suppose it has a place in mature and highly liquid markets, but cryptocurrency markets aren't that.  I think the risks while clearly large are also not particularly simple or easy to understand-- in theory there is some price where I should be willing to trade at a cash settled market, but I don't believe I could calculate that price.

[fillippone]

I think your post might make a better case against using deribit.   I use LedgerX -- I don't use deribit because it's not physically delivered, doesn't allow US customers, etc.

For the same reason you cannot use Deribit, I cannot use LedgerX. I am not an US residents, and I have by no mean way of accessing that market (I might be an NFA accredited individual, but this would expose to a number of opsec concerns).
So, for this pure theoretical discussion, I willl stick to Deribit, even if I do share your views toward the physical delivery exercise style.

This highlights why its not very useful to consider a position without its hedges or what its hedging.

Agree, this is actually not financial advice, that I think you don't need from me (at least not on a public thread on an anonymous base), but pure theoretical speculation applying the concepts we learnt on this thread on a practical case.

The positions I take are a bit wider than you assume-- $7.5k, 5k, or 2k strikes on the put side (which I try to get a premium comparable to a 15-20%/yr on the collateral, depending on the strike/date), and I'm getting more on the call side than you expected:  E.g. recent trades have me receiving  $2,699/BTC for JUN2021 50k, $6,985/BTC for DEC2021 35k,  and $4920/BTC for DEC2021 50K, to give some examples.

Thanks for the detail, however I don't understand how you can get more premium on a wider position. We are quite close to the historical maximum, so I think you sold those options with an higher implied volatility or with  a greater time value (you might have done those trades a few months ago, maybe?
At the moment an hypothetical JUN21 50K CALL would trade for 810 USD or a SEP 21 50K call would trade for 1600 USD.
Getting to 2,700 USD on the JUN21 50K CALL would imply a 133% on IV or a 108% on the SEP21 50K CALL.
Quite difficult right now, at least on Deribit, even though I think LedgerX and Deribit quotes must be pretty aligned.

So lets look at the value at expiration of a position consisting of {2 BTC, -1BTC 35k DEC2021 call, -1BTC 5k DEC2021 put} using some recent trade prices, and compare that to just hodl the same 2 BTC:

In exchange for diminished returns over a BTC price of $42,866, the position gets increased value at all lower prices.

Again it is absolutely down to personal preferences, but I see a very high asymmetry on this trade: keeping the USD as main numeraire of the trade, the loss is ee on the case of a moon scenario is orders of magnitude bigger than the benefit in case of a crash (which is ultimately due to the cashed premium). But, as you correctly said, it is down to the global portfolio allocation, and risk preferences.
All this to conclude that there is not a way to determine which is the superior strategy.

<...>
Under a more conservative model -- using the derivative of delta at the options premium to get the assignment odds under black-scholes

• , the 35k call 1yr call is about 12.5% likely to get assigned.  

This is  not correct.
The delta of the Black and Scholes model is not the probability of getting in-the-money.
There are a few ways of explaining this:

• The BS model operates in a risk-neutral framework. The probabilities in the model are not real world probabilities, but risk neutral probabilities, as the pricing comes out of an risk free arbitrage pricing. Hence the delta (the sensitivity of the option price to the underlying price) differs from the real world probability of getting in-the-money
• On a more analytical way, if we look at the price of an option in the BS Formula the delta is N(d₁) while the probability of getting in the money is N(d₂). In particular we know that as d₁ is always greater than d₂ also N(d₁)>N(d₂), hence the delta is always bigger than the probability of getting in the money. This  is particularly true for longer dated options and volatile underlings, as both conditions are verified in case of 9 months options on bitcoins, I would be careful with this equivalence.

The way I see it, owning Bitcoin on an ongoing basis is a massive bet for and against a collection of black swans:

This is the best part of your post, and I couldn't agree more.
An hedge against a black swan, is the reason I first bought Bitcoin, as I explained in my interview.

Aside, I did some image processing magic and managed to make a 'flatter' projection of my bookshelves.

This is the second best part of your post!

[fillippone]

The rally and the recent volatility gave space to Deribit to include higher strike options to their market:





I think that, apart for obvious marketing purpose, they wait for the option to have a delta of ,say, 1% before listing them. Who would trade a 0% delta option? i.e. an option that doesn't change her value with the price of the underlying?

So we now see this evocative 100,000 strike call on September  2021 (expiry date 24 September 2021, the longest available expiry on Deribit).

Let's look at the screen:




We see that this option quotes 3.83c bid to 4.1c, implied vol around 100% and a delta of 12%.
A 12% delta, means that for every dollar in the underlying level, the call moves in the same direction of 12% of such move, 12c.  Of course this gives the option a very high leverage, as with the initial cash amount (premium + collateral) we would spend for, say 1 BTC, we can gain a bigger exposure to BTC movements.

This means those deep OTM options are more a gambling tool than a proper hedging tool.
Also the idea of selling those to cash in the premium expose to a potentially unlimited loss for a less than 4% premium upfont. I think the risk/reward scenario is too adverse.
 
Also the liquidity is not great. The book is quite empty at the moment:



 Exiting at the wrong time could hinder the whole strategy, as on those very illiquid strikes market makers usually "remeber" the trades, and so they are quite good at "skewing" the markets against the customers.

[fillippone]

I'm playing on the testnet and have some difficulties with understanding.

Can someone take one example from my transaction log and trade history and explain to me how to interpret it?
I generally understand the mechanism behind buying/selling calls and puts (thanks to fillippone) but some parameters are a bit confusing to me.

What I was really hoping to see after maturity is the amount of premium I paid, the price at maturity and my profit or lose. But I'm not sure which parameter shows that.


Transaction log




Trade History

Deribit has a slightly different working compared to other exchanges.
First of all you should order your transactions log according to time, as I have the strong suspect it is not order with this criterium.
Secondly in testate you are given a deposit of 10 BTC you can use to simulate your strategies.

Then you can use those coins to trade: you buy an option and you do an "open trade" and when you sell it it is a "close trade". When you buy an option the ASK price + Fee are taken away from your balance.
Your equity then becomes equal to the balance + the mark value of the option.

When you decide to close the trade the opposite happens: you do the opposite sign operation on the option (sell, in this case), and the premium less fees are added to your balance, while the mark value of the option is substacted from the equity value.

The exchange forces you to sell when doing the expiry of an options.

Your Final P&L is then the final amount of the portfolio.
The P&L on a single option is basically the sum of the trades.

It might be counterintuitive, but the system is based on a "Mark to market" approach: the P&L on the single deal is irrelevant, as the only relevant thing is the final P&L of the book.

[fillippone]

Deribit just added the 400K call strike!

We've added the $BTC 400K strike in the Dec21 expiry! 🚀

Send tweet!

https://twitter.com/DeribitExchange/status/1349566146341605376?s=20


Wow!

Actually, this strike has already been quite successful: already 67.5 lots exchanged:




You can spot also a block trade of 50 options.
What if Bitcoin expires above 403069 on Dec 31, 2021 (350 days left?) the leverage is astonishing!

Also, given the extremely high implied volatility, the delta is not so tiny: 15% is something that is going to move in your portfolio!


Of course, this is not a surprise: the options market has been extremely successful in this last leg up and recorded incredible volumes:



Options volume have been steadily rising, with may exchanges with very high volumes, now almost comparable with the ones registered in the future market. 

[fillippone]

Tomorrow is the expiry day for the March options, a usual Tweet like this surfaced:

https://twitter.com/BTC_Archive/status/1375206135406415874?s=20

What does it mean?



More than 6 Billions$ out of the record 15B$ in Open Interest is going to expire tomorrow.

	This is going to be a massive Expiry, with the highest Open Interest position ever.

Let's have a look at the expiry per strike:

	Open Interest in BTC per Strike

The blue bars represent the put: the bet on the price going down, so we see their Open Interest is mostly skewed to the downside, as the bet for the buyer is to gain from a lower market price. As opposite the light green bars are the calls, that end in the money with higher prices.

The red dots represent, for each strike, the number of options expiring in the money.
If the price is very high, all the calls will be in the money, while the price expires in the lower range all the puts will be in the money.
We see that if prices expire at the higher end the number of trades in the money will be higher, as a consequence ho the higher call/put ratio.

What happens in the middle? there is a saddle point.
This point is called Max Pain Price. Max pain for the options buyers, who will see the least amount of exercised options.

	This is how the Max Pain Price Evolved with the market moving.

Of course, this is the max pain for the options buyers, but the maximum profit point for the option sellers.
Usually, the option sellers are more sophisticated players (just remember that selling options pose an unlimited risk of loss while capping the potential gain at the premium).

So I read a few comments suggesting that the biggest players will try to move down the market, trying to push the expiry price toward the max pain point, trying to minimise their losses.

Just remember that reading the Open Interest, the open positions on strikes (max pain included) is an art that borders on the art of divination.

Just as it is true that those who buy the options do so to ensure themself (but the end-user can also sell them, the options), who is on the other side of the trade is a professional, who acts with a totally different perspective. He is often not interested in the direction of the market, but in the trend of the only quantity on which the price of the option depends: volatility.

This is why I am always doubtful when we associate the positions of the options of the forecasts on the trend of the market direction. They risk taking big blunders. Do you remember when Ray Dalio caused a sensation when he bought a one billion premium put on the SPX? well it turned out that his funds were globally still long the market, and that the put was only a partial hedge pf the whole position.

[fillippone]

Apparently, this "max pain price" thing made the round and some professional options trader decided to tell his view:


https://twitter.com/pelioncap/status/1375366926231289856?s=21

So, in a sense, we were on the same boat (phew...) as dismissing the informative value of the "max pain price", even more, when the spot is far from it.

[alatvian2]

Wow there's a lot of stuff in this thread.

Sure would be nice if there was an options trading site that was available to mere mortal retail traders. 

[fillippone]

Wow there's a lot of stuff in this thread.

Sure would be nice if there was an options trading site that was available to mere mortal retail traders. 

I think Deribit is not out of reach. Provided of course you are not from the US.
The problem could indeed be your own legislation.

[DaRude]

Wow there's a lot of stuff in this thread.

Sure would be nice if there was an options trading site that was available to mere mortal retail traders.  

I think Deribit is not out of reach. Provided of course you are not from the US.
The problem could indeed be your own legislation.

If you're in US there's LedgerX https://www.ledgerx.com it's one of few exchanges in US thats regulated by CFTC "fully-collateralized futures and options" so KYC/AML, BTC settled without margins

https://www.cftc.gov/PressRoom/PressReleases/8230-20

[fillippone]

A nice reminder Bitcoin is still in price discovery mode: volatility spiked over the last weekend following the (bad) news about Elon Musk, Tesla and subsequent idiotic tweets



Volatility spiked in BTC, interrupting a multi-month downward trend.
Just remember this is the implied volatility or the volatility expected over the next period.
Traders basically think Bitcoin will be much more volatile after that news, so are pricing option with a higher volatility level.

Also note that other asset classes, namely credit and equity, have experienced the same spike in volatility. Hence Bitcoin here is moving rhyming with other asset classes.

[savetheFORUM]

I felt like this excellent guide needs a INDEX and I have built one for you. Please preview the code and if you like it, please feel free to use it. I can edit/add anything as you may wish.

I wanted to decorate it further but I felt the simple text was best suited for the guide.

Code:

[size=14pt][b][color=navy][anchor=intro]Introduction[/color][/b][/size]

Options on bitcoin have been accessible only to whales and on very specific exchanges as Deribit, but when Bakkt and CME, the two main traditional bitcoin exchanges will open the products to their clients option trading in bitcoin will become more widely accessible.
Actually options trading has been available on Bakkt since December 9th, while CME will launch similar product later this month, starting trading form the January 13th.

Options are a difficult instrument to trade. This is true on traditional markets, but this is even more true in a wild market like bitcoin.

With this thread I will try to give a few theoretical and practical hints on how to understand, price and use options.
I will start detailing what an option is, explaining all the characteristics of the options and what they mean for the investor.
Then I will briefly explain how to price them. I won’t explain the details of the mathematical model used to price those, because it would imply some advanced differential calculus nobody wants to hear about. What I will try to do is to convey what factors have an impact on option price and how to interpret those. I will also try to clear the field from some common misconceptions about options.

Last I will explain a few common strategies on options trading. Nothing too complicated, just a few examples on how to use them according to investment purpose: be it speculation or hedging.


[hr]

[size=14pt][u][b]INDEX[/b][/u][/size]

[list]
[li][iurl=#intro]Introduction[/li]

[li][iurl=#WIAO]What is an option[/iurl]
[list]
[li][iurl=#STR]Strike[/iurl][/li]
[li][iurl=#TTE]Time to expiry[/iurl][/li]
[li][iurl=#VOL]Volatility[/iurl][/li]
[li][iurl=#EX]Example[/iurl][/li]
[/list]
[/li]

[li][iurl=#HPO]How to price an option[/iurl][/li]


[li][iurl=#HVIV]Historical Volatility vs Implied Volatility[/li]

[li][iurl=#OSH]Option strategies - How to use an option[/iurl]
[list]
[li][iurl=#LT]Leverage Trading[/iurl][/li]
[li][iurl=#CCW]Covered call writing[/iurl][/li]
[li][iurl=#COL]Collar[/iurl][/li]
[/list]
[/li]

[li][iurl=#WOC]Word of caution[/li]


[li][iurl=#USS]Useful resources:[/iurl]
[list]
[li][iurl=#OCA]Online Calculators:[/iurl][/li]
[li][iurl=#EP]Exchanges product informations:[/iurl][/li]
[li][iurl=#OC]Online courses:[/iurl][/li]
[/list]
[/li]
[/list]

[hr]


[size=14pt][b][color=navy][anchor=WIAO]What is an option[/color][/b][/size]

An option is a contract that gives the holder the faculty, but not the obligation, to trade an asset, called the underlying asset, before the expiry, the termination date of such contract.
The option that gives the holder the [b]faculty to buy the underlying[/b] asset is called [b]call option[/b].
The option that gives the holder the[b] faculty to sell the underlying[/b] asset is is called a [b]put option[/b].
The price at the trade will happen is called the strike price.
When an option generates a trade then we say it is "exercised", otherwise it simply ends without any trade put in place we say it is "abandoned".
If an option can be exercised only at the termination is called European Option, while if it can be exercised anytime before the termination is called American Option.
The price the buyer of the option pays to the seller, or the writer of the option, is called premium.

If the market price is above the strike price, the call option is called "in-the-money", because in case of American exercise it could be exercised with profit. Otherwise the call option is called "out-of the-money". 
If the market price is below the strike of the put option, the put option is called "in-the money", because in case of American exercise it could be exercised with profit. Otherwise the put option is called "out-of the-money".

If we look at a certain strike then, only call options or put option can be in-the-money, not both of them. For example if we look at 10,000 strike options, the call are now out-of-the money, while puts are in-the-money. 

At expiry, if the option can generate the underlying asset what has been priced is called “physical delivery”. Many commodity or financial options are physically settled. Alternatively an option can regulate only the cash equivalent of the profit exercising the option itself: that expiry then an in-the-money option would deliver the buyer a cash amount equal to the difference between the asset price and the strike (in case of a call option) or the difference between the strike price and the asset (in case of a put option). In this case the option is called cash-settled.

In the case of Bitcoin options, namely the Bakkt options on BTC futures, the option is physically settled: at the expiry of the option the in-the-money option generates an appropriate position in the underlying future. There’s only a peculiarity: as it is common on many commodity options, the option itself expires a few days before the future, so the holder of the in-the-money options has the possibility to close the future position before the actual delivery of the underlying of the future (the option has the future as underlying, the future has the bitcoin as underlying). This is why you probably heard some marketing nonsense where “Bakkt options allows you to choose the type of delivery: physical or cash)". 


Before analysing mathematically how to price an option, let’s see that impact the pricing with the intuition. 

[anchor=STR]STRIKE: The first element is the strike. Of course the difference between the market price and the strike is the first hint at the value of an option. Intuitively the more an option is in-the-money, then the more such an option must have value.  
When an option is in-the-money, such option has intrinsic value. For both both call and put options, the intrinsic value is equal to the difference between the underlying price and the strike price: intrinsic value only measures the profit as determined by the difference between the option's strike price and market price.
When an option is out-of-the money instead, the intrinsic value is zero. 
The intrinsic value is the minimum value of an option: if the value of an option would be less than the intrinsic value, could be arbitraged, buying that option and exercising it to profit. 

So when BTC is trading at 7,000, a call with strike K = 5,000 is in-the-money and has an intrinsic value of 2,000, so the price must be greater than that. At the same time a call with a strike K =10,000 has no intrinsic value, so the intrinsic value is zero.


Of course intrinsic value is only a part of the pricing of an option: other variables impact on the option pricing each one of them adding value to the intrinsic value getting the final value of the options: 

[anchor=TTE]TIME TO EXPIRY: the second most important  element when pricing an option is the time to expiry: the longer the time to expiry, the dearer the option. If we price two options with all characteristics being equal, but the exercise date, the one with the exercise date the furthest away, will have the greater price. 

[anchor=VOL]VOLATILITY: the greater the volatility of the underlying asset, the greater the value of the option. Here the explanation gets a little bit tricky. Let’s say that the main reason it is not the greater the volatility of the underlying, the greater the possibility of the underlying going in-the-money. We will see later why this is important, just take in mind that is not obvious. The option buyer don’t profit from the option going in-the-money. Rather don’t profit only if the option goes in-the-money. The buyer of the option benefit just because the underlying asset moves (i.e. it is volatile) under a risk neutral approach, i.e. without taking the “risk” of profiting because the option goes in-the-money. 


[anchor=EX]Let's see an example: 
We buy a call option on BTCUSD, with a strike price of 8,000 USD, expiring in June 2020. 
The strategy is named Long call, because buying something is called being "[i]long[/i]" in finance jargon. 
The premium for this option is 1,350 USD, we have to pay immediately ("[i]upfront[/i]", again in finance jargon).

Fast forward to option expiry.
The outcomes of our option differ according to the final price of bitcoin: 

If BTCUSD is below 8,000 USD the option is abandoned, it expires worthless. 
If BTCUSD is above 8,000 USD the option is exercised, and generate a payoff equal to the difference (positive) between BTCUSD and the strike price.

In more formal terms the call option payoff is the following: 

Call=max(0;Spot-Strike)

The final payoff of the strategy will be the following: 

[img]https://i.imgur.com/ZQ0OHQq.jpg[/img]

Note that this graph considers we paid a premium of 1,350 USD upfront, the premium must be paid in every scenario: if the option expires worthless the P&L (Profit&Loss) of the strategy is negative and equal to the premium paid, otherwise is equal to the option payoff netted with the premium paid. 
Note that the P&L starts increasing at the strike price level, 8,000 USD in this case, but breaks even at an higher level equal to the strike + the premium plaid, or 9,350 USD in this example.  

Let's see the same thing for a put option.
We buy a put option on BTCUSD, with a strike price of 6,000 USD, expiring in June 2020. 
The strategy is named [i]long put[/i]. 
The premium for this option is 732 USD, we have to pay "[i]upfront[/i]".

Fast forward to option expiry.
The outcomes of our option differ according to the final price of bitcoin: 

If BTCUSD is above 6,000 USD the option is abandoned, it expires worthless. 
If BTCUSD is below 6,000 USD the option is exercised, and generate a payoff equal to the difference (positive) between the strike price and the BTCUSD.

In more formal terms the put option payoff is the following: 

Put=max(0;Strike-Spot)

The final payoff of the strategy will be the following: 

[img]https://i.imgur.com/NIEvSyf.jpg[/img]

The graph looks familiar, as it is the symmetrical payoff than the call.
Note that this graph considers we paid a premium of 732 USD upfront, the premium must be paid in every scenario: if the option expires worthless the P&L of the strategy is negative and equal to the premium paid, otherwise is equal to the option payoff netted with the premium paid. 
Note that the P&L starts increasing at the strike price level, 6,000 USD in this case, but breaks even at an lower level equal to the strike - the premium plaid, or 5,267 USD in this example.
  
[hr]

Let’s have a look at an option exchange looking for confirmations.
All the examples are from Deribit, who is the only widely available source for option prices: creating an account is easy and don’t require KYC. If you are interested to do it for educational purposes. Of course standard disclaimers apply and I am not by any mean linked to that exchange. 

If we select BTC options, and then 26 Jun 2020 we will find a screen like the following: 

[url=https://i.imgur.com/kG5jaVw.jpg][img width=800]https://i.imgur.com/kG5jaVw.jpg[/img][/url]
[size=8pt][i](click on the image to enlarge it)[/i][/size]

This particular page considers the options maturing on 26 Jun 2020.
The center gray column represent the strike levels. The options on the same row share the same strike price. 
On the left of that column we have the call options for each strike, while the puts are on the right hand side. 
The bid price is the price where other participants want to buy the options, i.e. the price you have to sell at if you want to sell it. 
The ask price is the price where other participants want to sell the options, i.e. the price you have to pay for if you want to buy it. 
Each bid and ask price has a corresponding Implied Volatility level, that is the volatility level that, if inputted in the model, gives back the aforementioned price. 
This is why speaking of options, volatility and price are excheangeable concepts. 

As we saw earlier, we see that the calls have diminishing price when the strike goes up: the 6,000 call has a mid price (the average between the bid and the ask) of 0.29725 BTC, while the 10,000 call has a mid price of 0.11275 BTC.
The opposite is true for the puts. The puts with lower strike have lower premiums.
The put stuck at 10,000 has a price of 0.46075 BTC, while the 6,000 put has a mid price of 0.09725 BTC.
Also we can see that examining options with greater time to expiry each option has a greater value: the 10,000 USD strike call maturing in September has a value of 0.16775 BTC versus the value of 0.11275 of the same option maturing in June.The 6,000 strike put has a value of 0.13175 BTC versus the value of 0.09725 of the same option maturing in June.

If we plug the data we find on that page in an option calculator we can reprice the option itself. 
If we try to reprice the 8,000 USD call, inputing 0% as interest rate (BTC is a non dividend paying asset) and the correct information about strike, underlying and implied volatility, we get the (almost) exact valuation we have on Deribit:  

[img width=800]https://i.imgur.com/5oz5Ayq.jpg[/img]

The numbers below the option price are the [i]"greeks"[/i] or the  sensitivities of the option price to their various component: 

DELTA: it's the sensitivity of the option price to the underlying: if the underlying goes up 1 USD, the option price goes up 0.55 USD.
GAMMA: it's the second order sensitivity of the option price to the underlying: if the underlying goes up 1 USD, the option delta goes up 0% (I guess there's a rounding factor here to consider in this calculator)
VEGA: it's the sensitivity of the option price to the volatility level: if the volatility goes up 1%, the option price goes up 20.54 USD.
THETA: it's the sensitivity of the option price to the time: if 1 day passes, the option price goes down 4.39 USD.
RHO: it's the sensitivity of the option price to the interest rates: if interest rates go to 1%, the option price goes up 13.49 USD.

The greeks of an option are linked one to each other in a pretty complicated way, there are many ways to interpret them and they all varies continuously given the level of the market, the volatility and the time to maturity. 
Books have been written on how to tame them and use it on your favour. I think this very brief explanation is enough for this thread. 


[hr]
[size=14pt][b][color=navy][anchor=HPO]How to price an option[/color][/b][/size]

Understanding the details of how options are priced, would mean to understand very advanced mathematics, including stochastic calculus, differential calculus, statistics, etc. 

Here I want only to give you a few important concepts, you have to keep in mind when thinking of options and their value. 

Black&Scholes won the Nobel prize for their option pricing model. Their biggest achievement was to demonstrate it is possible to price an option using non arbitrage conditions. An arbitrage is a trade where a profit is gained involving no risk and no capital. Of course those trades do not exists, so markets will adapt themselves to avoid these situations. Reasoning under the “non arbitrage”conditions, means also that no risks are involved, hence the individual appetite for risk of each different trader in the market can be taken out of the equation. This means that every trader in the market will reason using the same “language”of a world without risk (if we reason with no arbitrage conditions, we can ignore the associated risk, then we can ignore the willingness of every trader to take that risk). This means the price of such a derivative is unique, irrespective of the risk appetite for each trader. This has the important consequence the price of an option is INDEPENDENT from the probability given by each trader about the possibility of the underlying ending in-the-money. This is something we have to keep in mind: the price of an option doesn’t mean automatically that the scenario where it ends in-the-money is more “plausible”. 

[size=14pt][b][color=navy][anchor=HVIV]Historical Volatility vs Implied Volatility[/color][/b][/size] 

As we can see the only “difficult” input to price an option is the volatility to be used. 
The correct number to be plugged into the pricer is the expected future realised volatility until the expiration of the option. Quoting this number means quoting the price of the option (being the other option pricing numbers deterministic, i.e. known without uncertainty). 
The volatility level used to price an option is called implied volatility, because it’s the level of volatility “implied” by the quoted price. 
How do you quote the future volatility? 
Here’s the trick of option trading. 

The first idea is to look at the realised volatility: looking at the past can give a first guidance of the future volatility. Of course this is not always true as there can be many factors that can change the volatility in the future. One easy example, specific to bitcoin options could be the halving. This event, according to many models, could have a great impact on the bitcoin price. So we can guess that coming into the halving the volatility will be low: bitcoin might move, but without great variations, but once the halving happens, the price will possibly start swinging more, due to very different valuation the S2F model imply. In this case realised volatility won’t be a good guidance for the future volatility: namely the realised volatility will be much lower than the future volatility used to price options with expiries after the halving. 

Many websites calculate the realised volatility of bitcoin: on Deribit you can get one.


Calculating historical volatility with different horizons yield very different results: 

[img]https://i.imgur.com/MWQSd9J.jpg[/img]

In the above graph we see the bitcoin price (black line, left axis), with the superimposition of different historical volatility calculations using different terms (yellow, red and blue lines, right axis). Volatility in the short term can be more “volatile” itself (yes, there is a volatility of volatility, but this is for advanced option trading). The yellow line represents the annualised historical volatility calculated using the previous 10 trading days, and as we see in the above graph is swinging more violently, from 180% to below 20%. Volatility calculated over more extended periods of time, like the blue line (calculated over the last 30 days of data) or the red line (calculated over the last 180 days of data) are instead more and more stable as we extend the calculation interval. 
Of course we are more interested in matching, with the caveat earlier explained, the historical volatility computation with the time to expiry of the option we want to price. 


The implied volatility can instead be observed on option markets. If we look at the options screen above we see some IV columns: that is the implied volatility corresponding to each quote. If we use the model on the opposite way, we can use the price as an input and find the volatility implied into that price: that is the implied volatility. 


[hr]

[size=14pt][b][color=navy][anchor=OSH]Option strategies - How to use an option[/color][/b][/size]


Options are very complicated instruments, here I want to highlight only a few uses of them. 
These are the most simple ones, and all have in common to be “static” strategies. This means those are meant to be put in place and not touched until maturity. There are different strategies meant to be adjusted during the life of the option. These are totally different animals and they are called dynamic strategies. 


[size=11pt][b][anchor=LT]Leverage Trading[/b][/size]

Scenario: 
You want to gain as much possible exposure to bitcoin.
You have a very clear trading view. 
You are not interested in losing your capital if this view doesn’t materialise. 

Strategy: 
Use your funding to pay the premium for an out-of-the-money option, choosing the strike to maximise the expected final payout. 

Example:
- Buy 1 call option strike 7,000 USD, Jun Expiry at 0.233 BTC. 
alternatively
- Buy 1 call option strike 8,000 USD, Jun Expiry for a total of 0.1805  BTC.
 
[img]https://i.imgur.com/5fBtxq3.jpg[/img]

Analysis:
In this scenario you have gained exposure to the appreciation of bitcoin above the strike level using only a fraction of the capital required to buy the underlying (i.e. 1 bitcoin). 
In case of bitcoin being at a price of 10,000 at expiry, in case of a bitcoin investment you would have a return equal to (10,000-8,000)/8,000=25%. 
This is the base case scenario of a no leverage.

Buying an in-the-money call option the return would be instead (10,000-7,000-1,742)/1,742=72%.
Note that if the option gets further in-the-money the return goes up even further as the option paid is constant, while the gain increase linearly. 

In the second example we bought an out-of-the-money option, using even less capital. 
In case of bitcoin being at a price of 10,000 at expiry, the yield would be in this case (10,000-8,000-1,350)/1,350=48%.

Of course in the scenario of an opposite movement your loss is limited to the premium paid, which would be lost entirely. 
This implies that you have to choose wisely not only the strike level, to gain the correct level of exposure, but also the expiry, as the movement has to materialise Before the expiry of the option. 


 
[size=11pt][b][anchor=CCW]Covered call writing[/b][/size]
Scenario: 
You are a whale you want to sell part of your bitcoin holding to finance you daily expenses. You are bullish on the bitcoin as an investment. 

Strategy: 
Sell out-of-the-money calls, cash in the premium to finance your expenses, actually sell bitcoin only if price go up (possibly on a spike). 

Example:
- long 1 bitcoin,
- sell 1 option strike 10,000 USD, Jun Expiry at 0.11 bitcoin. 

[img width=500]https://i.imgur.com/zOwFj6s.jpg[/img]

Analysis:
The payoff of the structure give you a benefit over the simple holding of bitcoin equal to the premium if the price is below the strike price at maturity.
If at expiry the price is above the strike, the option goes in-the-money and you sell the bitcoin. 
The strategy has a break-even, compared to being long the BTC only, at a level equal to strike + premium received (in this example at 10,000+0.11*7,478=10,826 roughly). 
If the BTC goes further up, you basically sold a bitcoin at 10,826, hence the strategy has a lower value against holding the bitcoin. 


[size=11pt][b][anchor=COL]Collar[/b][/size]
Scenario: 
You are a whale.
You want to sell part of your bitcoin holding to finance you daily expenses.
You are bullish on the bitcoin as an investment.
You get pissed off in case of violent drawdown in bitcoin prices. 

Strategy: 
Sell out-of-the-money calls, cash in the premium to finance your expenses, actually sell bitcoin only if price go up (possibly on a spike). 
Use the cashed in premium to buy a protection on the downside, i.e. buying a put option. 
Buying an out-of-the-money call and selling an out-of-the-money put is a strategy known as "Collar".

Example:
- long 1 bitcoin, 
- sell 1 call option, strike 10,000 USD, Jun Expiry at 0.11 BTC, 
- buy 1 put option, strike  6,000 USD, Jun Expiry for 0.098 BTC.

[img width=500]https://i.imgur.com/87NTW4T.jpg[/img]

Analysis:
The final payoff is similar to the one of the covered call writing. 
The payoff of the structure give you a benefit over the simple holding of bitcoin equal to the difference between the premiums paid to buy the put and the premium cashed in to sell the call. In this particular case I chose two strike levels to have the smallest positive difference between the twos. If the price is below the strike price at maturity.
If at expiry the price is above the strike, the option goes in-the-money and you sell the bitcoin. 
The strategy has a break-even, compared to being long the underlying, at a level equal to strike+premium received (in this example at 10,000+(0.11-0.098)*7478=10,093 roughly). 
If the BTC goes further up, you basically sold a bitcoin at 10,093.
On the contrary, if BTC goes down, you also bought a protection at 6,000, as you are long a 6,000 put. More precisely, as you cashed in a premium of 93 dollars, you are protected at a 6,093 USD. In case bitcoin goes down more, you are not affected, as the payoff of the put protects you on the downside. 

[hr]

[anchor=WOC]Word of caution. 
Options are a very complicated topic.
I tried my best effort to explain this topic in the most simple and intuitive way.
I can expand the thread on the direction you prefer. Just ask me to explain what you are interested the most or the point you want me to dig more precisely. 

[hr]

If you think this thread or [url=https://bitcointalk.org/index.php?action=profile;threads;u=1852120;sa=showPosts]any other of my threads[/url] is worth being translated in your onw local board, please do! I will be happy to provide assistance!

[hr]

[anchor=USS]Useful resources:
[anchor=OCA]Online Calculators: 
[url=http://www.option-price.com/index.php]Option Calculator[/url]

[anchor=EP]Exchanges product informations:
[url=https://www.theice.com/products/72948304/Option-on-Bakkt-Bitcoin-USD-Monthly-Futures/specs]Option on Bakkt ™ Bitcoin (USD) Monthly Futures[/url]
[url=https://www.cmegroup.com/cme-group-futures-exchange/options-bitcoin-futures.html]Options on Bitcoin Futures[/url]

[anchor=OC]Online courses:
Basic: [url=https://www.cmegroup.com/education/courses/introduction-to-options.html] CME Option Course[/url]
Advanced: [url=https://zerodha.com/varsity/module/option-theory/]Options Theory for Professional Trading[/url]

[hr][hr]
This post is eligible for my project: 

[center][url=https://bitcointalk.org/index.php?topic=5230761.msg53972826#msg53972826][color=blue][size=20pt]Help me translate my best posts in your Local Board[/size][/color][/url][/center]

[quote]I am a strong believer in the utility of local boards.
I am lucky enough to be able to express myself in at least a couple of languages, but I know this is not the case for everyone.
A lot of users post only in the local boards because of a variety of reasons  either language or cultural barriers, lack of interest or whatever other reason.
I personally know a lot of very good users (from the italian sections mainly, for obvious reason) who doesn't post in the international sections.

I think all those users they are missing a lot of good contents posted on the international (english) section or on other boards.[/quote]

If you think you can help here, just visit the thread!

[fillippone]

Tomorrow it's expiry time again:



The total size might not be huge, but please note there is a big Open Interest on the 40K strike. When there is a big open position on a strike that is likely to be crossed just before the expiry, well strange gyration can happen, depending on if the market maker community is long or short gamma.
If the market makers are long gamma they are going to buy the market below 40K and sell it above. Hence the level could act as a "magnet". On the contrary, if they are short, they are forced to sell below  40K and buy above 40K. In this case, 40K would act as a spring, pushing the market away.

[fillippone]

I felt like this excellent guide needs a INDEX and I have built one for you. Please preview the code and if you like it, please feel free to use it. I can edit/add anything as you may wish.

Thank you very much, much appreciated.
I updated the OP with your Index, and corrected a few typos here and there!

[fillippone]

Tomorrow is expiry date for BTC options.

A few thing can happen on expiry day.

I guess the expiry won’t be too volatile, as we have witnessed low realised volatility in the last sessions:



Max pain is the price where the expiring options have the lowest intrinsic value. So it’s the price where the option buyers spent the most to have nothing. So in the proximity of the expiry the Max pain price can act as a magnet for the price, or actually can be either a magnet or a spring to push the market away, depending on the global positioning (long or short) on that strike price (just remember that Open Interest cannot differentiate long and short positions)



You can read an interesting thread on the max pain price here

[fillippone]

The guys at Laevitas updated their dashboard and option calculator.



app.laevitas.com

Here you can find a lot of informations about BTC options and futures.

I will try to use it more in my analysis, as I think it is the most complete by far available for free.

[fillippone]

CME is going to launch options on BTC and ETH micro futures:


Introducing options on Micro Bitcoin and Micro Ether futures

Those instruments will be available to trade starting March 28.

From the website:

To build on the strength and liquidity of CME Group's recently launched Micro Bitcoin and Micro Ether futures, we're giving you more options to trade. Introducing two options contracts designed to bring more flexibility to your cryptocurrency trading strategies:
Options on Micro Bitcoin futures
Options on Micro Ether futures
*Pending regulatory review
Explore your options
 
Precisely scale your exposure up or down
Fine-tune your bitcoin and ether exposure or tailor a risk profile with underlying contracts sized at 1/10 of their respective tokens.

Add versatility to your trading strategy
Express long- or short-term views and expand the strategies you can build – market neutral, directional, and more – with your choice of weekly and monthly expirations.
 
Enjoy anytime, anywhere trading access
Trade nearly 24 hours a day from around the world electronically on the CME Globex and CME ClearPort platforms.

Trade in a regulated marketplace
Like all CME Group Cryptocurrency products, Micro Crypto options are CFTC-regulated, allowing for market transparency, centralized trading, and reduced counterparty risk.

Review frequently asked questions for Micro Crypto options, such as strike listings, options expirations, and trading hours associated with the contracts.

[fillippone]

The official Deribit Account has been quite active lately with a series of tweets about Options.
The first one I want to signal is about the Black and Scholes model, which is the most commonly used to price option.
As traders say: "That is the wrong model, where input the wrong number, under the wrong hypothesis, only to get the right number".

Have fun reading it:

[fillippone]

A lot of chatter about ETH options lately.
Bloomberg published an article here:

Derivatives Suggest a ‘Sell-the-News’ End to the Ethereum Rally

If you cannot manage to get through the paywall, you can read the full article here .

Originally the article stems from a studio by Glassnode you can find here:

Betting on the Merge

They note that ETH options now have a higher Open Interest than Bitcoin OPtions. A clear sign of an incoming catalyst on the market.

In particular, they compare September and October Smile:



The skew in the call, on the upside, is particularly steep, while the opposite in the October expiry, after the merge: the call skew is flat, while the put options are more expensive.



This means that the traders are willing to sell any spike in the ETH token, having dim expectations for price after the merge.

The study is really interesting ,and also it will be to take an eye on the development of the situation.

[fillippone]

CME Group just announced the launch of Ether Options.

The ETH derivatives market grew too much to be left to incumbents or to unregulated players, so CME broadened their offering toward this new instrument. Micro ETH was aimed at retail investors,not institutional ones.

Official press release

This move might be aimed at capturing some of the “merge-frenzy” we have seen in the past past weeks, but it might be too late doing now.

In addition, I am sharing this Bloomberg Article

CME Group Announces Launch of Ether Options
PR Newswire
CHICAGO, Sept. 12, 2022
CHICAGO, Sept. 12, 2022 /PRNewswire/ -- CME Group, the world's leading derivatives marketplace, today announced the launch of options on Ether futures.
"As market participants anticipate the upcoming Ethereum Merge, a potentially game-changing update of one of the largest cryptocurrency networks, interest in Ether derivatives is surging," said Tim McCourt, Global Head of Equity and FX Products, CME Group. "The launch of our new Ether options contracts is particularly well-timed to provide the crypto community with another important tool to gain access to and manage exposure to ether. Our new options contracts will also complement CME Group's Ether futures which have seen a 43% increase in average daily volume year over year."
"Options are an essential part of the trading strategy deployed by Cumberland's institutional counterparties, whether that's to hedge risk or gain exposure to the asset class without having it on their balance sheets," said Rob Strebel, Head of Relationship Management for DRW. "CME Group has proven trading and clearing infrastructure backing the product and we're excited to provide liquidity on day one. As ether transitions through the anticipated merge this week, we expect we'll continue to see strong demand for this Ether options contract."
"Genesis is proud to consistently provide day-one support of CME Group's ever-expanding suite of crypto derivatives and offer the newest derivatives products to our institutional clients," said Leon Marshall, Global Head of Sales at Genesis. "The launch of the new Ether options contract ahead of the highly anticipated Ethereum Merge provides our clients with greater flexibility to trade and hedge their Ether price risk."
These new contracts deliver one Ether futures, sized at 50 ether per contract, and based on the CME CF Ether-Dollar Reference Rate, which serves as a once-a-day reference rate of the U.S. dollar price of ether.
For more information on this product, please visit www.cmegroup.com/ether.
As the world's leading derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data – empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals.  The company offers futures and options on futures trading through the CME Globex® platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform.  In addition, it operates one of the world's leading central counterparty clearing providers, CME Clearing.
CME Group, the Globe logo, CME, Chicago Mercantile Exchange, Globex, and, E-mini are trademarks of Chicago Mercantile Exchange Inc.  CBOT and Chicago Board of Trade are trademarks of Board of Trade of the City of Chicago, Inc.  NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange, Inc.  COMEX is a trademark of Commodity Exchange, Inc. BrokerTec and EBS are trademarks of BrokerTec Europe LTD and EBS Group LTD, respectively. Dow Jones, Dow Jones Industrial Average, S&P 500 and S&P are service and/or trademarks of Dow Jones Trademark Holdings LLC, Standard & Poor's Financial Services LLC and S&P/Dow Jones Indices LLC, as the case may be, and have been licensed for use by Chicago Mercantile Exchange Inc.  All other trademarks are the property of their respective owners.
CME-G

We recently saw how traditional finance is absent to ETH markets. Maybe the offer of this product can stimulate the demand?

[fillippone]

A little update on the implication of this selloff in the option markets.

Volatility surface steepened massively: from vol spiked, albeit with little effect on longer-term vol:



While 7-day vols spiked, longer-end vol remains at subdued levels.

Actually, the front vol has been trading at a heavy discount to longer vols:




You see how low was the green line in respect to the purple line. Of course, the market turmoil partially reversed this, and trades scrambled to buy vols.

[fillippone]

Options on CME reach an ATH.

Bitcoin options volume, open interest on CME soar to hit all-time highs, risk is 'back on'




Worth noting options on CME are a tiny fraction of options traded on more exotic venues, and represent mainly risk appetite from regulated subjects.

[d5000]

Taking the opportunity to revive this excellent thread

As some followers of Bitcoin options surely already have seen, the BitVol (implied volatility based on option prices) is currently on record low values of 36-39. The previous low was about 43 in January 2023. This means that options are currently very cheap, people seem not to expect much volatility for the short term. I've created a thread in the Speculation forum about this, but it's only marginally getting the kind of attention I'd desired (it gets some attention, but mainly from low-quality posters).

There's an opinion article of Glassnode's newsletter which argues that volatility could currently be mispriced, i.e. options being cheaper as they should be. According to Glassnode's article, "volatility premiums [are] trading at less than half the 2021-22 baseline". Also BTC derivatives in general have hit an all time low in terms of trade volume - at least BTC derivatives dominance seems to be trending up, so altcoin derivatives are even seeing lesser volume.

Regarding options only, trade volume seems to have grown up to April/May (like seen in the last post), but then starting with the tight sideways markets have hit quite significant lows (although not all-time lows). And even longer-term options contracts (e.g. for mid-2024) have low volatility premiums.

What do option experts think? Is the market really thinking we're about to see a long sideways market or is there some flaw in the current option pricing like Glassnode suspects? (It doesn't seem to be only a "summer" phenomenon, as in 2022 the situation was quite different).

[fillippone]

Taking the opportunity to revive this excellent thread

As some followers of Bitcoin options surely already have seen, the BitVol (implied volatility based on option prices) is currently on record low values of 36-39.

Thank you. I am always a little bit sceptical when I see a report saying something is “mispriced”.
I guess the implied vol is low because also realised has been quite subdued. So yes, I guess implied is low because option market foresee low volatility for the next weeks. Bear that you can have low volatility also if market rallies a lot. Volatility is variation around the mean:if the mean is the one of an appreciation, then volatility can go down even if the bitcoin is running high

[fillippone]

I didn't know earlier, but I stumbled on a series of videos that are quite informative about option trading: Glassnode Clips.
There is a video from three days ago, that analyses the drop in implied vols in Bitcoin:



This video shows how to interpret in the current trading environment using concepts like implied volatility, delta skew, volumes, and Open interest.

[wavessurfing]

I didn't know earlier, but I stumbled on a series of videos that are quite informative about option trading: Glassnode Clips.
There is a video from three days ago, that analyses the drop in implied vols in Bitcoin:



This video shows how to interpret in the current trading environment using concepts like implied volatility, delta skew, volumes, and Open interest.

source ?

[JayJuanGee]

I didn't know earlier, but I stumbled on a series of videos that are quite informative about option trading: Glassnode Clips.
There is a video from three days ago, that analyses the drop in implied vols in Bitcoin:

This video shows how to interpret in the current trading environment using concepts like implied volatility, delta skew, volumes, and Open interest.

source ?

Did you try clicking on the pic?