@Goomboo and @FreeMoney: regarding market hours, yes, you are right FreeMoney that closing allows room for maintenance, changes, and settlement. It's also hospitable to conservative traders. Most finance, and indeed Bitcoin too for now, takes place in the U.S. The rationale was that doubling the hours of high volume exchanges like the NYSE and being open holidays would be welcomed.
I agree - make it a small amount of time, preferably once a week (if needed). The more up-time, the better.
- regarding lot size I agree there may be some that wish to speculate "for fun", similar to penny slot machines in Las Vegas. Right now with volatility in the cents range, and the fact we have a .65 contract fee, 1 BTC wouldn't be mathematically feasible. However, I will add the 10 lot size.
I would suggest that you make your fee be BTC based
. Instead of $.65 per contract, make it $.0065 per BTC. That would allow people to trade in whatever size they want. Logically, your structure doesn't make any sense as is - you shouldn't pay the same commission for a 100 BTC contract that you do for a position 10 times that size. Most serious brokerages charge you per volume
you trade, not how many trades you perform.
The absolute best case
for commissions however, is a commission based on the notional value of the trade. Rather than a dollar amount per BTC, a percentage would be better. I suggest a .15% commission.
-I buy a call for 100 BTC with a strike of $5.20
-I pay a .15% commission: 100 BTC * $5.20 / BTC * .0015 = $.78
The major benefit here is that you'll still be in business if BTC price falls to $.05 per BTC. Think it through from a customer's standpoint - why would I use your service to trade BTC if the commission I pay is substantial in relation to the actual value of what I purchase?
- regarding the $150 capped payout, it is there so option value can be guaranteed and thus speculated upon. If we were to use your suggestion what would happen when a price movement forced a margin call, and it was defaulted? The option value would be compromised. How could people reliably trade options like that?
Boom, you nailed it - welcome to the world of derivatives! Derivatives introduce a whole new form of risk called counter-party risk: will the person on the other side of my trade pay up at the end of the day? Counter-party risk is a huge component of trading derivatives and something that I think you were on the right track to answer, but I think you can do better. I do suggest that you keep a required amount held in the customer's account, but allow the person holding the option the possibility of earning more. Here's how:Mitigating Counter-party Risk
-To open a trade, a customer must post enough collateral to cover a move in prices against their position equal to a reasonable amount:
Price Protection Move = (20% + number of weeks / 100) * (1 + number of weeks / 52)
-So the amount of margin they must post is: Absolute Value(Strike Price * (1+Price Protection Move) - Strike Price) * BTC of position
-Don't gloss over this, think it through. Here's a chart showing what this looks like followed by an explanation below:
-Someone buys a call for 100 BTC with a strike at $5.20 and a duration of 20 weeks
-The seller of the call must post $288
-At the end of 20 weeks, the price is $10
-Buyer should receive ($10 - $5.20) * 100 = $480. If the seller of the option is unwilling / unable to pay, the buyer still receives $288. I have some ideas on how to keep the sellers of options liquid that I'll get to in a minute.
Now here's the explanation - it makes sense that your margin requirements should be sufficient to cover reasonable price movements in a given amount of time. The chart about shows a sample of what "could be" reasonable. It is reasonable to say that prices could go up or down 20% in a given week and that the volatility on a longer timeframe is higher. As it stands, who would buy an option 1 year out if the most they can make on it is $150? The goal here is that buyers of options get paid AND they have the potential to make a killing on a trade
.How to keep the sellers liquid
-Sellers of options must post collateral
-This collateral is "flagged" and they cannot withdraw that amount or that amount is not used in calculating account balance for opening new trades
-Seller must maintain an account balance equal to the floating profit of the buyer of the option or seller's account is frozen until funds are received. The idea here is that if someone buys a call at $5.00 and price goes to $50.00, we don't want the seller of the call running for the hills. Any funds in the seller's account are seized (up to the necessary amount) until the contract expires.