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I would be very careful with using this for risk management. It has very different characteristics from exchange-traded options contracts that you may be famili
by bjterry 13y ago
I would be very careful with using this for risk management. It has very different characteristics from exchange-traded options contracts that you may be familiar with in the US. Purchasing call options is pretty safe (excluding security risks, of course), but purchasing put options is quite dangerous. They have a margin requirement of 20% on put options that are written by users, but critically, this is the maximum amount of liability the put writer is taking on. So it's actually not a put you are buying, but a "bear put spread" with a lower leg 20% below the upper leg. This makes it unsuitable for managing tail risk, which, for bitcoins, is significant. For example, if you had bought a contract at $1100 which is roughly the top of the bitcoin market in December, and it fell to $600, you would only be covered for $220, and would be out $280 plus the cost of the contract (Edit: apparently this isn't correct, in another comment they say that you get the cost of the contract back).
The fact that they require 100% margin on call options isn't as much of a concern (for simple risk management applications), because you still gain the exposure to the underlying bitcoins. It would be like if the exchange required you to submit 100 shares of MSFT to them to open the call contract, rather than using cash settlement. It's not good for liquidity because it makes it hard to be an options trader, but there will be very little liquidity anyway the way it's set up currently.
Another concern is that the guide doesn't disclose what they use as the underlying price for the contract, what exchange they use as the benchmark.
It should also be noted that they appear to require photo id in order to withdraw any funds from your wallet, which is likewise not disclosed in their guide.
- simon_ 13y agoI was going to write a response disagreeing based on the assumption that, like any normal exchange, Derivabit would fully intermediate the trade. But after reading the guide, I realize you are correct! They explicitly say the maximum you could ever recover on your put option is the 20% margin. In my opinion this is extremely misleading and to call such a contract a "put" and hide the real definition in a FAQ is straightforwardly wrong.
- bjterry 13y agoI just noticed that they don't actually provide an order book or any sort of bid-ask spread information. That makes price discovery extremely challenging, and makes this even more difficult for providers of liquidity (traders, dealers, etc.). Charitably, I assume this is coming and they haven't had time to implement it yet.
- ciscoriordan 13y agoThe order book is at https://derivabit.com/order_book https://derivabit.com/order_book. You can drill down into specific contracts for more details. There is also a summarized version built into the trade form.
- bjterry 13y agoOh, I see. I didn't realize those line-items were clickable. For the interface of the order book you should really check out how it's displayed on a trading system or something (with bids and asks in separate columns), although it's impossible for me to know how your system would look with more orders attached.
- greenyoda 13y agoAnother cause for concern is that this is a company whose only staff seem to be two engineers and a designer.[1] Do any of these guys have any experience in running a financial services business? Do they know how to comply with legal and regulatory requirements? Do they have enough capital in reserve to satisfy their financial obligations under a worst-case scenario, or will their customers be left holding the bag? The web site doesn't even state in which country this business is located. [1] https://derivabit.com/about https://derivabit.com/about
- ciscoriordan 13y agoThanks for the suggestions, the guide has been updated. Regarding your other concerns, we'll address those with more complicated margin requirements for new contracts and multi-sig Bitcoin transactions. For now, you can just set an extremely high price limit for buying puts in exchange for the tail risk you're taking on. Edit: buying, not selling
- bjterry 13y agoAccording to my understanding of your materials, one isn't taking on tail-risk if one is writing puts on your site. In actuality, the price you require to write puts should be lower than if you were writing real puts, not higher.