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Author Topic: Everything you wanted to know about BTC options but were afraid to ask!  (Read 2618 times)
fillippone (OP)
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December 14, 2020, 12:30:04 PM
Merited by tranthidung (2)
 #61

I think your post might make a better case against using deribit.  Smiley 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!

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fillippone (OP)
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December 18, 2020, 03:13:33 PM
Last edit: May 16, 2023, 12:51:33 AM by fillippone
 #62

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.










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December 20, 2020, 11:20:45 PM
Last edit: May 16, 2023, 12:50:56 AM by fillippone
 #63

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.



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fillippone (OP)
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January 14, 2021, 11:48:03 PM
Last edit: May 16, 2023, 12:38:24 AM by fillippone
 #64

Deribit just added the 400K call strike!


Quote
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. 



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fillippone (OP)
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March 25, 2021, 11:21:10 PM
Last edit: May 16, 2023, 12:16:26 AM by fillippone
Merited by vapourminer (1), JayJuanGee (1)
 #65

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

Quote

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.



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March 26, 2021, 12:29:17 PM
Last edit: May 16, 2023, 12:15:58 AM by fillippone
 #66

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.



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alatvian2
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May 06, 2021, 02:16:04 AM
 #67

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 (OP)
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May 07, 2021, 09:06:52 PM
 #68

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.

..JAMBLER.io..Create Your Bitcoin Mixing
Business Now for   F R E E 
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DaRude
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May 09, 2021, 01:25:57 AM
Merited by fillippone (2)
 #69

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

"Feeeeed me Roger!"  -Bcash
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May 17, 2021, 08:30:19 PM
 #70

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.



..JAMBLER.io..Create Your Bitcoin Mixing
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savetheFORUM
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May 22, 2021, 09:25:14 AM
 #71

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!


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May 27, 2021, 10:41:33 PM
 #72

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.

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May 27, 2021, 11:05:59 PM
 #73

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!

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January 27, 2022, 06:14:47 PM
Last edit: May 15, 2023, 05:36:32 PM by fillippone
Merited by JayJuanGee (2)
 #74

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





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February 16, 2022, 03:27:19 PM
Last edit: May 15, 2023, 02:00:22 PM by fillippone
Merited by JayJuanGee (1)
 #75

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.

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March 01, 2022, 04:17:20 PM
Merited by JayJuanGee (1)
 #76

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:

Quote
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.

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April 20, 2022, 09:46:28 PM
Last edit: May 15, 2023, 01:03:47 PM by fillippone
 #77

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:




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August 15, 2022, 11:20:47 AM
 #78

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.

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September 12, 2022, 12:53:35 PM
 #79

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

Quote
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?

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March 09, 2023, 09:02:57 PM
Last edit: May 15, 2023, 10:30:09 AM by fillippone
Merited by JayJuanGee (1)
 #80

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.


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