[ANN] Trade Bitcoin Options - BitcoinOPX.com [NOW OPEN]

[BitcoinOPX]

@GoomBoo: regarding any attempt to calculate volatility of BTC/USD pricing I simply refer you to the monthly chart view on our home page:

https://bitcoinopx.com/?v=m

Take a look at that for a second. For the approximate 1 year from April 2011 to April 2012 bitcoin price was around $5 before exploding to almost $32 (500% increase!), and then lowering to around $15 (still about 200%), before settling back down around $5.

Now, I've been following bitcoin for quite a while, and that was no fluke. A good number of "bitcoiners" fully expect another explosive price jump in time, and 1 year away is not infeasible. The formula used takes this into account.

- regarding our trade fee, again, it's not the impediment to offering 1 BTC. Even ignoring any trade fee, do you really think it makes sense to open and close a trade with an expected return of $.05 cents? As for a comparison to Mt.Gox there is little comparison. They are a currency exchange, which is like a utility. On the other hand we offer both a financial product and service.

- regarding option pricing, yes, the highest bid and lowest ask are shown on the option chain chart.

Edit: regarding "nibbling" off an option, you are correct, it can't be done. This is similar to traditional options. One option contract for GOOGLE represents 100 shares of GOOG, and traders can't "nibble" 10 of those shares away.

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[Goomboo]

- regarding dynamic lot size starting with 1 BTC I don't think that would work well, actually for the same reason you give about having 52 weeks. It's harder for the market to concentrate around any particular grouping. Traditionally, of course, an option represent 100 shares of a company. Can you imagine if the model were switched to allow dynamic sizing of underlying shares? How could traders find common ground or value on options for AAPL which could be 63 or possibly 1,022 underlying shares?

I need to return to this to say one more thing.  This is why you really need to change your bid / offer to a per BTC figure (that's how they do it over at Zecco [who is really just showing you the option tier that everyone else is seeing] too).  You always need to look at an option on a per unit basis - in other words, what value are they asking for the right on one unit.

Here, toy around with this and plug in AAPL's values:

http://www.numa.com/cgi-bin/numa/calc_op.pl

Notice at the bottom, it tells you the fair value to own the right of a single share.

[BitcoinOPX]

@GoomBoo - regarding 1 BTC, again, there are two things which make it infeasible in my eyes. First, the resulting profit differential is too meager to garner any interest, and second the unlimited variations of lot size would make it hard if not impossible for the market to coalesce and determine value.

[Goomboo]

@GoomBoo: regarding any attempt to calculate volatility of BTC/USD pricing I simply refer you to the monthly chart view on our home page:

https://bitcoinopx.com/?v=m

Take a look at that for a second. For the approximate 1 year from April 2011 to April 2012 bitcoin price was around $5 before exploding to almost $32 (500% increase!), and then lowering to around $15 (still about 200%), before settling back down around $5.

Now, I've been following bitcoin for quite a while, and that was no fluke. A good number of "bitcoiners" fully expect another explosive price jump in time, and 1 year away is not infeasible. The formula used takes this into account.

Right and what I'm telling you is that what you have represents a belief that prices will only move up or down 15% in a given week up to x% across a given timeframe.  If prices move 30% in a given week, your customers will be blown out of the water and you'll be getting some angry emails from holders of options.

What you have is good (a dynamic escrow quantity), but eventually (as your product matures), you can do better (by using a market-based approach).

I'm aware that I'm totally tearing into your product, but that's because I actually want to use it - check my posting history, this is the only thing that has drawn me onto these boards in 3 months.

[Goomboo]

@GoomBoo - regarding 1 BTC, again, there are two things which make it infeasible in my eyes. First, the resulting profit differential is too meager to garner any interest, and second the unlimited variations of lot size would make it hard if not impossible for the market to coalesce and determine value.

Profit.  My whole point is that at 1 BTC contract size, I'll be trading 50 contracts and those 50 contracts won't be there if 50 smaller guys aren't allowed to play because they have to trade higher.  (Ignore the fact that you put in a 10 contract and look at my point).  By

Value.  Define value - what do you mean value?  The market will have LESS difficulty coming together because there will be MORE liquidity showing in the book.

And please don't misunderstand anything of what I'm saying as trying to be argumentative - I want you to have a strong product and this type of debate really helps iron out details that could potentially derail a new venture.

[BitcoinOPX]

Right and what I'm telling you is that what you have represents a belief that prices will only move up or down 15% in a given week up to x% across a given timeframe.  If prices move 30% in a given week, your customers will be blown out of the water and you'll be getting some angry emails from holders of options.

What you have is good (a dynamic escrow quantity), but eventually (as your product matures), you can do better (by using a market-based approach).

I'm aware that I'm totally tearing into your product, but that's because I actually want to use it - check my posting history, this is the only thing that has drawn me onto these boards in 3 months.

The likelihood of prices moving 15% versus 30% or even far more are factored into the formula. As shown in the example above as time lengthens volatility risk mandates much higher reserve placed in escrow. This can cover over a 130% price move in 1 year. If at any time the actual price move makes higher escrow necessary the option creator has 24 hours to add funds or the account is frozen and the option is settled immediately.

[da2ce7]

Well at least Goomboo's sugestions are out in the public, so when BitcoinOPX's competitor is designing it's system they can implement them all.

@BitcoinOPX

You would be very wise to take all of Goomboo's suggestions on-board... If there is one person on this forum to listen to, it is him.

His trading advice has been instrumental in teaching people how to not-loose money when the market was more volatile.  I blame a large amount of the stabilization of the Bitcoin's price on his thread:

https://bitcointalk.org/index.php?topic=60501.0

[BitcoinOPX]

@GoomBoo - regarding 1 BTC, again, there are two things which make it infeasible in my eyes. First, the resulting profit differential is too meager to garner any interest, and second the unlimited variations of lot size would make it hard if not impossible for the market to coalesce and determine value.

Profit.  My whole point is that at 1 BTC contract size, I'll be trading 50 contracts and those 50 contracts won't be there if 50 smaller guys aren't allowed to play because they have to trade higher.  (Ignore the fact that you put in a 10 contract and look at my point).  By

Value.  Define value - what do you mean value?  The market will have LESS difficulty coming together because there will be MORE liquidity showing in the book.

And please don't misunderstand anything of what I'm saying as trying to be argumentative - I want you to have a strong product and this type of debate really helps iron out details that could potentially derail a new venture.

@GoomBoo - I can't "Ignore the fact that you put in a 10 contract" because the 10 lot size was put in.

- we will have to disagree on how the market may come together.

- I understand you are not trying to be argumentative. I'm very appreciative of your feedback.

[Goomboo]

Right and what I'm telling you is that what you have represents a belief that prices will only move up or down 15% in a given week up to x% across a given timeframe.  If prices move 30% in a given week, your customers will be blown out of the water and you'll be getting some angry emails from holders of options.

What you have is good (a dynamic escrow quantity), but eventually (as your product matures), you can do better (by using a market-based approach).

I'm aware that I'm totally tearing into your product, but that's because I actually want to use it - check my posting history, this is the only thing that has drawn me onto these boards in 3 months.

The likelihood of prices moving 15% versus 30% or even far more are factored into the formula. As shown in the example above as time lengthens volatility risk mandates much higher reserve placed in escrow. This can cover over a 130% price move in 1 year. If at any time the actual price move makes higher escrow necessary the option creator has 24 hours to add funds or the account is frozen and the option is settled immediately.

Yep, it really makes logical sense - the greater the period of time, the greater likelihood of a certain percentage move.  It'll work better than an arbitrary $150 payout cap.

Settled immediately isn't an idea I had though about and it adds an interesting twist to your product - it turns a European style option into an American that is immediately exercised at a certain threshold.  Hmm, interesting idea, I'll have to think on that one...I kinda like it :p

By all means, use the 15% number.  I'd be aware though that put options should be capped at 100% (commodity prices do go negative, but not in BTC ).  It make no sense for a put seller to hold $500 when the most they could lose is $400 (etc, you get the point).

My point that I am insistent on is that you should just look at your numbers.  Rather than saying 15% is reasonable, look at what the market actually did rather than imposing your opinion / intuition on it.  The absolute best thing you can do here is drop any notion of what you think is normal and dig into the data to find out the truth.  After learning the truth, apply it to your product so that YOU can make money from it!

The method I told you is almost identical to value-at-risk, which is used in almost every field of finance.  Rather than a risk manger saying "oh, I feel that he makes or loses a few thousand every day", he can say "every 20 days he makes or loses more than $x.xx".

[BitcoinOPX]

Well at least Goomboo's sugestions are out in the public, so when BitcoinOPX's competitor is designing it's system they can implement them all.

@BitcoinOPX

You would be very wise to take all of Goomboo's suggestions on-board... If there is one person on this forum to listen to, it is him.

His trading advice has been instrumental in teaching people how to not-loose money when the market was more volatile.  I blame a large amount of the stabilization of the Bitcoin's price on his thread:

https://bitcointalk.org/index.php?topic=60501.0

@da2ce7: Many changes have come from @Gooboo's feedback. He is obviously an experienced and knowledgeable trader.

[Goomboo]

Well at least Goomboo's sugestions are out in the public, so when BitcoinOPX's competitor is designing it's system they can implement them all.

@BitcoinOPX

You would be very wise to take all of Goomboo's suggestions on-board... If there is one person on this forum to listen to, it is him.

His trading advice has been instrumental in teaching people how to not-loose money when the market was more volatile.  I blame a large amount of the stabilization of the Bitcoin's price on his thread:

https://bitcointalk.org/index.php?topic=60501.0

Lol thanks for the nice words but me saying a few things on a message board usually isn't enough to stop the market in its tracks :p ... I really just wanted people to stop losing their money :p

[Goomboo]

@GoomBoo - regarding 1 BTC, again, there are two things which make it infeasible in my eyes. First, the resulting profit differential is too meager to garner any interest, and second the unlimited variations of lot size would make it hard if not impossible for the market to coalesce and determine value.

Profit.  My whole point is that at 1 BTC contract size, I'll be trading 50 contracts and those 50 contracts won't be there if 50 smaller guys aren't allowed to play because they have to trade higher.  (Ignore the fact that you put in a 10 contract and look at my point).  By

Value.  Define value - what do you mean value?  The market will have LESS difficulty coming together because there will be MORE liquidity showing in the book.

And please don't misunderstand anything of what I'm saying as trying to be argumentative - I want you to have a strong product and this type of debate really helps iron out details that could potentially derail a new venture.

@GoomBoo - I can't "Ignore the fact that you put in a 10 contract" because the 10 lot size was put in.

- we will have to disagree on how the market may come together.

- I understand you are not trying to be argumentative. I'm very appreciative of your feedback.

Alright, agree to disagree and I am very thankful for the changes you have made...this is the first serious attempt at a BTC option exchange I have seen and I'm genuinely excited about it.  I really do want you to succeed here. 

The second the BTC derivative scene really takes off, I'm going to be hammering the exchanges for deliverable contracts, contracts that can be moved from exchange to exchange (like BTC), and of course - exotics :p

[BitcoinOPX]

Yep, it really makes logical sense - the greater the period of time, the greater likelihood of a certain percentage move.  It'll work better than an arbitrary $150 payout cap.

Settled immediately isn't an idea I had though about and it adds an interesting twist to your product - it turns a European style option into an American that is immediately exercised at a certain threshold.  Hmm, interesting idea, I'll have to think on that one...I kinda like it :p

By all means, use the 15% number.  I'd be aware though that put options should be capped at 100% (commodity prices do go negative, but not in BTC ).  It make no sense for a put seller to hold $500 when the most they could lose is $400 (etc, you get the point).

My point that I am insistent on is that you should just look at your numbers.  Rather than saying 15% is reasonable, look at what the market actually did rather than imposing your opinion / intuition on it.  The absolute best thing you can do here is drop any notion of what you think is normal and dig into the data to find out the truth.  After learning the truth, apply it to your product so that YOU can make money from it!

The method I told you is almost identical to value-at-risk, which is used in almost every field of finance.  Rather than a risk manger saying "oh, I feel that he makes or loses a few thousand every day", he can say "every 20 days he makes or loses more than $x.xx".

@Goomboo: yes, put options are capped and don't go negative.

- regarding looking at the numbers, I have. I've looked at all the historical numbers. As mentioned, I've been around bitcoin for much of its history. The value is not some random intuition. It's based on reasonable expectation and what is probable acceptable risk.

[Goomboo]

Yep, it really makes logical sense - the greater the period of time, the greater likelihood of a certain percentage move.  It'll work better than an arbitrary $150 payout cap.

Settled immediately isn't an idea I had though about and it adds an interesting twist to your product - it turns a European style option into an American that is immediately exercised at a certain threshold.  Hmm, interesting idea, I'll have to think on that one...I kinda like it :p

By all means, use the 15% number.  I'd be aware though that put options should be capped at 100% (commodity prices do go negative, but not in BTC ).  It make no sense for a put seller to hold $500 when the most they could lose is $400 (etc, you get the point).

My point that I am insistent on is that you should just look at your numbers.  Rather than saying 15% is reasonable, look at what the market actually did rather than imposing your opinion / intuition on it.  The absolute best thing you can do here is drop any notion of what you think is normal and dig into the data to find out the truth.  After learning the truth, apply it to your product so that YOU can make money from it!

The method I told you is almost identical to value-at-risk, which is used in almost every field of finance.  Rather than a risk manger saying "oh, I feel that he makes or loses a few thousand every day", he can say "every 20 days he makes or loses more than $x.xx".

@Goomboo: yes, put options are capped and don't go negative.

- regarding looking at the numbers, I have. I've looked at all the historical numbers. As mentioned, I've been around bitcoin for much of its history. The value is not some random intuition. It's based on reasonable expectation and what is probable acceptable risk.

I'm feeling a bit sassy and I mean no offense :p

http://lmgtfy.com/?q=define+intuition

You just described to me how you've looked at the numbers and have an idea of what they are...that equals intuition!  And the funny thing about humans and our intuition is that we're normally wrong.

I'm saying that you need to find the average to the 4th decimal place, find the standard deviation, multiply it by 2 and add it to the average so that I can be 95% certain that your number makes sense.  I have no idea what a standard deviation of returns is for 1 week, 1 month, 1 year, but I'm willing to take a trade that you don't either (yet).  If you want to be super-cool about it, do all the calculations on log-normal returns rather than standard returns (they account for a more true distribution of returns and are additive - but knowing that was extra credit in FINC 689 so not too important ).

This has huge repercussions -> what if I enter a trade and my payout is only $150 when the TRUE and FAIR payout should have been $200 due to someone's concept of "this is normal"?  I've been shortchanged by someone who was unwilling to do the legwork to find out what that option should have required for margin.

Again, I'm sassy and harsh at times, but I really do wish your success.  This is something I learned at a place I once worked - when someone is smashing you about every single number you put forth, you learn your stuff pretty quick :p

[sunnankar]

That is violating the terms that he said he would accept!

This is why you really need ONLY a 1 BTC contract size.  "I will buy 1000 1 BTC puts at this price...".  If you don't make it this way, you have (3 x however many terms you are offering) markets that will be trading...I doubt there are that many active traders in the world of BTC :p

Ding ding ding. The way options came to be was based on commodities where a standard contract for a certain amount of a certain quality commodity was to be delivered at a certain date in the future. Due to fabrication issues it would be possible to delivery different weights that were still within good delivery standards. For example, a '400oz GD London bar' might actually weigh 397.65oz or 404.22oz.

With BitCoin there is no divisibility issue imposed by physical law. Therefore, there is only a need for a 1BTC, .5BTC or even .1BTC (optimistic about the BTC price in USD!) contract and buyers or sellers can just increase their volumes.

Regarding counter-party risk, since it appears you do not want to be the market maker, you need to have this figured out or there will be a Bear Stearns, Lehman Brothers, JP Morgan and etc.

To start I would .1BTC contracts expiring weekly with 4 weeks out as the longest contracts. Have margin calls in place and only make a market when you can successfully close positions. Then allow longer terms as volume increases and you are able to successfully manage margin calls, margin requirements and collateral.

[Goomboo]

Regarding counter-party risk, since it appears you do not want to be the market maker, you need to have this figured out or there will be a Bear Stearns, Lehman Brothers, JP Morgan and etc.

I think he's on to a good start with requiring customers to post collateral (hopefully based on market volatility).


Edit: To be honest that's the one thing that really caught my eye about this exchange - the fact that I:

1.  Can't sell options and then run away
2.  Will have a payment at the end of the day if I'm long an option

[BitcoinOPX]

I'm feeling a bit sassy and I mean no offense :p

http://lmgtfy.com/?q=define+intuition

You just described to me how you've looked at the numbers and have an idea of what they are...that equals intuition!  And the funny thing about humans and our intuition is that we're normally wrong.

I'm saying that you need to find the average to the 4th decimal place, find the standard deviation, multiply it by 2 and add it to the average so that I can be 95% certain that your number makes sense.  I have no idea what a standard deviation of returns is for 1 week, 1 month, 1 year, but I'm willing to take a trade that you don't either (yet).  If you want to be super-cool about it, do all the calculations on log-normal returns rather than standard returns (they account for a more true distribution of returns and are additive - but knowing that was extra credit in FINC 689 so not too important ).

This has huge repercussions -> what if I enter a trade and my payout is only $150 when the TRUE and FAIR payout should have been $200 due to someone's concept of "this is normal"?  I've been shortchanged by someone who was unwilling to do the legwork to find out what that option should have required for margin.

Again, I'm sassy and harsh at times, but I really do wish your success.  This is something I learned at a place I once worked - when someone is smashing you about every single number you put forth, you learn your stuff pretty quick :p

@Goomboo: this is where I ask if you're looking to be argumentative again

I said I had looked at the numbers in response to you saying look at your numbers.

This has huge repercussions -> what if I enter a trade and my payout is only $150 when the TRUE and FAIR payout should have been $200 due to someone's concept of "this is normal"?  I've been shortchanged by someone who was unwilling to do the legwork to find out what that option should have required for margin.

How do you define "fair"? What if I do what you suggest and when reality plays out the numbers are even further off? At some point traders have to take some share of responsibility themselves. The numbers are published, and if they are not comfortable with any mathematical outcome they are not forced to trade by anybody.

[BitcoinOPX]

Regarding counter-party risk, since it appears you do not want to be the market maker, you need to have this figured out or there will be a Bear Stearns, Lehman Brothers, JP Morgan and etc.

@sunnankar: yes, we have counter-party risk figured out. Traders must post and maintain sufficient collateral into escrow to open and maintain a position. It's all explained on our How it Works page.

[Goomboo]

How do you define "fair"? What if I do what you suggest and when reality plays out the numbers are even further off? At some point traders have to take some share of responsibility themselves. The numbers are published, and if they are not comfortable with any mathematical outcome they are not forced to trade by anybody.

You're requiring your customers to post margin to cover a certain move in prices.  This move in prices that you have chosen is based on what you feel is appropriate.  I'm suggesting that you require your customers to post margin to cover a move in prices that actually mimics reality.  Which is more "fair" - requiring customers to post margin based on what you feel reasonably covers a move or what statistically covers a normal move?

That's just it, if you do what I suggest, you have a statistical measure that tells you historically that only 1 out of 20 periods of time they risk receiving a shortfall in earnings from the market moving more than expected.  That should cover you when you receive 500 emails from angry traders who only received a payment sufficient to cover a 15% price move when the market actually ended up moving 50%.

You will have huge weeks in which BTC blows up or collapses.  Which of these two defenses would you prefer to employ?

1.  I felt that those were appropriate ratios based on me looking at the numbers.

2.  The price move was a big event which is bound to happen, however with our current margin model, in the long run this should only happen 1 out of 20 time-series.  In other words, 95% of the time, you will get paid in full.

I define a fair model as something which neither favors the buyers nor sellers but as something which is objectively based on historical data.  If you base this on what you feel is appropriate, you will ultimately be unfair to the buyers (by giving them too many shortfalls in revenue) or the sellers (by requiring them to post too much margin).

[FreeMoney]

@GoomBoo: regarding any attempt to calculate volatility of BTC/USD pricing I simply refer you to the monthly chart view on our home page:

https://bitcoinopx.com/?v=m

Take a look at that for a second. For the approximate 1 year from April 2011 to April 2012 bitcoin price was around $5 before exploding to almost $32 (500% increase!), and then lowering to around $15 (still about 200%), before settling back down around $5.

Now, I've been following bitcoin for quite a while, and that was no fluke. A good number of "bitcoiners" fully expect another explosive price jump in time, and 1 year away is not infeasible. The formula used takes this into account.

- regarding our trade fee, again, it's not the impediment to offering 1 BTC. Even ignoring any trade fee, do you really think it makes sense to open and close a trade with an expected return of $.05 cents? As for a comparison to Mt.Gox there is little comparison. They are a currency exchange, which is like a utility. On the other hand we offer both a financial product and service.

- regarding option pricing, yes, the highest bid and lowest ask are shown on the option chain chart.

Edit: regarding "nibbling" off an option, you are correct, it can't be done. This is similar to traditional options. One option contract for GOOGLE represents 100 shares of GOOG, and traders can't "nibble" 10 of those shares away.

I'm about to just let this go, but here's one more shot.

A 1BTC (or better, no min) lot size is not to make an expected return of 5 USD cents. It is to make some amount of bitcoins which many of us expect will be very valuable in the future.

Low minimums also allow users to get familiar with options and your site without large risk or a large amount of funds tied up.

Reducing to 1BTC min also enables 9BTC and 15BTC. I expect it will be quite some time before that amount of liquidity will not be of any use to you.