Mar 04 08:00:44 <draco49> mircea_popescu, I want to try your trading site, but I just don't get it...
Mar 04 08:00:52 <Joric> same
Mar 04 08:01:16 <draco49> I feel the same way I did before I learned how to play craps. I'm just staring at your site and my eyes are glazing over... I understand what a "traditional" option is, but I'm just not getting this... When you have some free time, could you please explain it to me?
A number of people have complained about this, so I've compiled this guide to cover the basics. Feel free to ask any questions here or if you prefer directly on #bitcoin-otc. Step 0.
You want to visit the page
and read the text there. Also, if you don't really know much about options you want to start by reading up on them, since this guide and MPOE in general assumes you understand what they are and how they work.Step 1a.
Opening a long position. This means you obtain some option contracts, either Calls or Puts, which you can later either sell back or exercise.
To open a long position, click on either CALL ASK or PUT ASK quotes for the month that interests you. For instance, to obtain CALL @ 1.0 contracts expiring this month (March 30th) you click on the first row 2nd column. You will be prompted to type in the number of contracts you would want to buy (each contract stands for 1 BTC) and then be given a quote, something like:
In order to buy 50 CALL @1.0 contracts expiring this month at $4.65000000 each please send exactly:
(Sell side depth: 50 @ 4.65)
at the address:
Next, you send an email
which must contain the quoted sum (50.00000102BTC) and your bitcoin address. That bitcoin address is where you will be receiving your change and any benefits from the option (if you sell it later, for instance). Most people just copy/paste the first two lines into the email along with their btc addy.
The Sell side depth tells you how your order will be executed. In this case you are dealing directly with MPOE itself. If there were other bids (from users) you'd first buy from them. MPOE only steps in when there are no other bids, to make sure that you can always buy and sell as needed (so the market stays liquid - MPOE is a Market Maker in financial terms).
After sending the email you send along the amount of bitcoins quoted. Make sure you don't end up rounding the figure, those last three digits are very important and without them your order is meaningless (and could end up forfeit). Once your transaction is received and processed you will receive a little change, resulting mostly from the rounding (when quoting your total MPOE rounds up the last three digits and then tacks on a code, which means that almost always you're owed back a few satoshi) but also due to any price movement.
That's it, you now own some Calls or Puts!Step 1b.
Opening a short position. This means you sell some option contracts, either Calls or Puts, which the buyer can then at any point exercise. Thus you are effectively writing options yourself.
In order to do this click on either CALL BID or CALL PUT quotes for the month that interests you. Mind that MPOE only allows covered selling.
In order to sell to open 111 PUT @1.0 contracts expiring this month please send exactly:
Just as in case 1a above, you send an email, then the amount. If you do not specify a quote in your email your sale will be executed by MPOE at the shown bid price. You will receive the result of your sale, so in this case if the BTC/USD price is 4.65 and the quote for PUT@1.0 expiring this month was 0.00002672 you receive 0.000637832BTC (0.00002672 each * 111 contracts / 4.65 btc/usd price). If you do specify a quote in your email you will be listed as such, and executed when someone buys into you.Step 2a.
Closing a long position. This means you're selling out some contracts you already have bought, hopefully at a profit.
In order to close your long position you click on either CALL BID or CALL PUT quotes for the month that interests you.
In order to sell to close 111 PUT @1.0 contracts expiring this month please send exactly:
First you send an email stating that, then you send the BTC amount. If you have no contracts MPOE will just keep your 0.9xxx BTC. If you have at least one contract, even if less than the number stated, they will be sold at the current quote, the total will have your 0.9xxx BTC added to it and the result will be sent over to your bitcoin address (the one you specified when entering the position). The most contracts you can sell at one time are 9999, resulting in something like 0.94029999BTC. If you just want to sell all your PUT @1.0 contracts you can also send a 0.9402BTC transaction (all zeros). Step 2b.
Closing a short position. This means you're buying back, hopefully at a profit, some contracts you earlier sold.
Closing a short position is no different for you than opening a long position, so see Step 1.a above.
Once the order to close out your short position is processed, you will receive your collateral plus your benefits, plus the clerical amounts. Let us look closer at an example to understand this better:
Today, John. R. Bitcoiner decides he wants to short sell some calls. He goes through step 1.a and sends 100.91100100BTC for 100 Call contracts @5.0 expiring this month. At the time of his sale the quote is 0.48484235 and BTC/USD = 4.65. He thus gets back 100 * 0.48484235 / 4.65 = 10.426717204BTC.
Now, suppose that John R. Bitcoiner keeps these options until expiry and they are never exercised (price stays under 5.0 till March 30th). Our monocled fatcat J.R. receives after the month's close his 100.91100100BTC back and gets to keep his original 10.426717204BTC, thus turning a little over 10% profit.
Alternatively, suppose that on March 25th the price of BTC/USD reaches 5.55 and John R. Bitcoiner is exercised upon. He will owe .55 (5.55 - 5.0, the strike) * 100 / 5.55 = 9.909909910BTC, which is subtracted from his collateral (100.91100100BTC). He then receives 91.001091090BTC back and his contracts are now closed. Overall, between 91.001091090BTC back from his capital and the 10.426717204BTC he made earlier he has received a total of 101.427808294BTC, which means a slight profit over his 100.91100100BTC expenses, in spite of the execution (and the price moving close to a dollar against him).
Even more alternatively, suppose that on March 23rd J. R. is unhappy with the looks of the market, so he decides to close his position. He then goes through the procedure outlined in step 1.a. above. Let's say he buys back the 100 Calls at a price of 0.65342912 each while BTC/USD = 5.05. This means he owes 0.65342912 * 100 / 5.05 = 12.939190495BTC. Once he sends these MPOE closes out his short position, sending back his collateral (100.91100100BTC). Thus he will have paid 100.91100100BTC + 12.939190495BTC and received 100.91100100BTC + 10.426717204BTC, making a 2.512473291BTC loss in the process.Step 3.
It is also possible to enter your own quotes in the system. Suppose the Calls @ 5.0 are quoted by MPOE 0.48484235 BID 0.92788600 ASK. If Jane. H. Bitcoiner buys some Calls, she can then send an email to MPOE asking for them to be listed for sale at say 0.9012865. Later, John R. Bitcoiner coming along would not see the original spread, 0.48484235 BID 0.92788600 ASK because the spread would include Jane's quote, and it will look like 0.48484235 BID 0.9012865 ASK. There's no rule that Jane has to ask for less than the quote offered by MPOE, she can ask anything she wants. If the price moves to expose her she will show.
John R. Bitcoiner wanting to buy CALLS would see on his buy page a market depth announcement, as for instance in our first example above "(Sell side depth: 50 @ 4.65)". In his case, saying Jane bought 100 Calls and she's offering them for sale, and John is looking to buy 200 Calls, his page would show "Sell side depth: 100 @ 0.9012865 + 100 @ 0.92788600".
If John buys these 200 Calls the quotes would return to their original condition (admitting no time has passed and the price hasn't moved). If he offers them for sale the same thing would happen again, except with that quote. Jane having her options sold would receive 0.9012865 * number of contracts bought / bitcoin price minus 1%
. The 1% is a fee MPOE charges all sellers (not buyers). On top of this Jane would have to pay 0.1 BTC fixed fee for the listing.
Phew, that was quite the long story. But anyway, I think now it should be clear how MPOE works. If there's anything still unclear don't hesitate to ask tho'.