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Counterparty risk makes this an even worse option than buying bitcoin. Consider many of the antecedent events which might cause bitcoin to implode. How many o

by patio11 13y ago

Counterparty risk makes this an even worse option than buying bitcoin. Consider many of the antecedent events which might cause bitcoin to implode. How many of them leave unregulated derivatives exchanges up and capable of receiving your "Assign 10,000 BTC puts at $100 to those people who are short them" notice then rounding up a million dollars of actual money to send to you? I've unfortunately wasted non-trivial time thinking about this, since if it were as reliable as shorting Zynga, I'd be as long puts as my risk tolerance can take.

bdcs 13y ago
You can always take out a bitcoin loan for a standard short. That has no counter-party risk (on your end). Also, Coinsetter is an US startup that will allow shorting and has a lower amount of counter-party risk, IMO.
- tptacek 13y ago
  What makes you think Coinsetter's counterparty risk is low?
dia80 13y ago
There can be no options since volatility is impossibly high.. lets take an example. You buy an $850 put with the spot price at $850 and it expiries in 6 months. 90 day realized volatility has been 130% annualized so the black-scholes formula says i have to charge you $300 usd for that option. You make money if BTC is $550 or below in 6 months. Your upside is $550 if it goes to 0 and down side is $300 usd. Still want to trade?
- tedunangst 13y ago
  I suspect you could find people willing to sell that put for less than $300. If there's no action at $300, somebody will step in at $200, or $100, or $10. Remember that Bitcoin can only go up, so there's no risk. It's like free money, you just have to be willing to accept a little less free money than the rest of market to get yours.
  - mey 13y ago
    https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory My apologies if you meant your statement as sarcasm.
    - mdpopescu 13y ago
      Ah... the "intrinsic value" theory. Hasn't this one died already?
- hasker 13y ago
  black-scholes also assumes the ability to dynamically, instantaneously hedge with very low transaction costs I recall. The market-maker has to charge even more to recover costs in this case since they cannot dynamically hedge and bid-offer tight nor is the market deep.
- patio11 13y ago
  My sketch of the math back when BTC was $1,000 was that BS had a 1 year put at a $100 strike valued at about a nickel. At that price, assuming availability in quantity and acceptable levels of risk caused by factors other than BTC being worth more than $100 in a year, I'd be buying.
tedunangst 13y ago
You could sell dollar calls for BTC and cash that out immediately. Opens you up to larger potential losses, but at least this way you're the risky counterparty. :)
- tedunangst 13y ago
  oops, too late to edit, but I realized you'd want to sell puts. Accidentally reversed too many parameters.
  - patio11 13y ago
    When someone expresses the desire to be "long", they mean they want to buy an instrument, rather than sell it. I want to buy puts, which means I profit if the price goes below the strike. Selling puts means I profit if the price stays above the strike. Since my belief is that BTC's long-term value is zero, selling puts is the last thing I'd want to do.
    - tedunangst 13y ago
      Not bitcoin puts, dollar puts. You have a tuple for each option position (buy or sell, call or put, usd or btc). You wanted to buy btc puts (buy, put, btc). You can create a similar position by reversing any two of those. I suggested, after the correction, (sell, put, usd). Another possibility is (buy, call, usd). Or (sell, call, btc). Unfortunately any position you buy is going to have counterparty risk, that's why I suggested selling. Well, it's not a real suggestion, just a thought.
ericb 13y ago
I'm always interested in hearing your thought process. Any interest in a blog post? Disclaimer: I am long and think that the asymmetrical nature of the possible payout makes bitcoin interesting as a "bet". I believe it is valuable because the use-cases it can deliver on make it a unique animal, so I would relate the it to the concept of going long on cars vs. horses.
minimax 13y ago
The conventional way of doing this is to require option sellers to post margin with the exchange. Bitcoin/USD futures and options contracts would have huge margin requirements.

by patio11 13y ago

bdcs 13y ago

You can always take out a bitcoin loan for a standard short. That has no counter-party risk (on your end). Also, Coinsetter is an US startup that will allow shorting and has a lower amount of counter-party risk, IMO.

tptacek 13y ago
What makes you think Coinsetter's counterparty risk is low?

dia80 13y ago

There can be no options since volatility is impossibly high.. lets take an example. You buy an $850 put with the spot price at $850 and it expiries in 6 months. 90 day realized volatility has been 130% annualized so the black-scholes formula says i have to charge you $300 usd for that option. You make money if BTC is $550 or below in 6 months. Your upside is $550 if it goes to 0 and down side is $300 usd. Still want to trade?

tedunangst 13y ago
I suspect you could find people willing to sell that put for less than $300. If there's no action at $300, somebody will step in at $200, or $100, or $10. Remember that Bitcoin can only go up, so there's no risk. It's like free money, you just have to be willing to accept a little less free money than the rest of market to get yours.
- mey 13y ago
  https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory My apologies if you meant your statement as sarcasm.
  - mdpopescu 13y ago
    Ah... the "intrinsic value" theory. Hasn't this one died already?
hasker 13y ago
black-scholes also assumes the ability to dynamically, instantaneously hedge with very low transaction costs I recall. The market-maker has to charge even more to recover costs in this case since they cannot dynamically hedge and bid-offer tight nor is the market deep.
patio11 13y ago
My sketch of the math back when BTC was $1,000 was that BS had a 1 year put at a $100 strike valued at about a nickel. At that price, assuming availability in quantity and acceptable levels of risk caused by factors other than BTC being worth more than $100 in a year, I'd be buying.

tedunangst 13y ago

You could sell dollar calls for BTC and cash that out immediately. Opens you up to larger potential losses, but at least this way you're the risky counterparty. :)

tedunangst 13y ago
oops, too late to edit, but I realized you'd want to sell puts. Accidentally reversed too many parameters.
- patio11 13y ago
  When someone expresses the desire to be "long", they mean they want to buy an instrument, rather than sell it. I want to buy puts, which means I profit if the price goes below the strike. Selling puts means I profit if the price stays above the strike. Since my belief is that BTC's long-term value is zero, selling puts is the last thing I'd want to do.
  - tedunangst 13y ago
    Not bitcoin puts, dollar puts. You have a tuple for each option position (buy or sell, call or put, usd or btc). You wanted to buy btc puts (buy, put, btc). You can create a similar position by reversing any two of those. I suggested, after the correction, (sell, put, usd). Another possibility is (buy, call, usd). Or (sell, call, btc). Unfortunately any position you buy is going to have counterparty risk, that's why I suggested selling. Well, it's not a real suggestion, just a thought.

ericb 13y ago

I'm always interested in hearing your thought process. Any interest in a blog post? Disclaimer: I am long and think that the asymmetrical nature of the possible payout makes bitcoin interesting as a "bet". I believe it is valuable because the use-cases it can deliver on make it a unique animal, so I would relate the it to the concept of going long on cars vs. horses.

minimax 13y ago

The conventional way of doing this is to require option sellers to post margin with the exchange. Bitcoin/USD futures and options contracts would have huge margin requirements.