- (3.51%) Bitcoin Volatility Index - Charts vs Dollar & More
- Introduction to Options Pricing and Implied Volatility (IV ...
- Assessing Bitcoin's Baseline Demand Through Trading and ...
- Historical Volatility — Technical Indicators — Indicators ...
- Impliedvolatility — Indicators and Signals — TradingView

This post is a look at the recently released Bitmex Up and Down contracts and the lack of clarity around them and the issues that has caused. There will be a little bit of maths and options terminology, but I'll do my best to try to keep it simple.

# Background and Contract Specification

Bitmex released the Weekly Up Contract (XBT7D_U110) for live trading on the 30th Apr, with the Weekly Down contract (XBT7D_D90) coming later, on the 14th May. Both contracts are essentially European style options contracts (with the addition of a knock out price for the Down Contract), which settle weekly on Fridays.

This was an interesting development on the part of Bitmex. They made 2 posts on their blog (1, 2) explaining the situation. Although, the blog posts weren't posted on the website announcement feed nor (to my knowledge) on their twitter, so many people (including myself) missed them.

While the contracts came with the usual Bitmex explanation of specification and example, what struck me was the fact that:

We now have the issue of a contract that many traders will have no idea how to price, that is consequently trading over 10x higher than fair value, and only the market makers are allowed to short.

# Options pricing and Fair Value

The Up contract is equivalent to a European style options call, while the Down contract is a slightly modified European options put. Options contracts give the buyer the right (but not obligation) to buy (call) or sell (put) at the given strike price on the settlement time (European style).

European style options contracts are generally prices using the Black-Scholes model, which is used to calculate the fair price of a contract along with measures of its sensitivity to various factors such as underlying price and volatility (known as Greeks).

Options Fair Pricing vs Current Pricing

At time of writing the Up contract (XBT7D_U110) last trade price is 0.00300 BTC (~$25.57), with 2.89 days until expiry. The Bitmex historical volatility index is currently 54.15%, strike price is $9500 and Bitcoin is $8530.

The black-scholes calculator suggests that the fair price is actually $1.916. And that is the calculation for a 1 Bitcoin contract. Where as the Bitmex contracts represent 0.1 XBT each. Making the fair value $0.1916, rather than the current $25.57. Which is a bit insane.

What if we use a higher value of volatility for our calculations, will the price be a bit more reasonable? Similar contracts trading on a different exchange have an implied volatility of ~75% annualised. This gives a fair value of $1.351 for each Up contract.

I've also occasionally seen Bitcoin volatility reach up to 120% or higher. This value still gives a fair value of $7.870.

In other words, even by the craziest stretch, the Bitmex contracts are trading way higher than their fair value - and only the Bitmex designated market makers are allowed to short.

# Options profit outlook

Now, what if the contracts were trading at fair value, what is the probability that the options would actually expire "In the money" (payout not zero).

One of the "Greeks" calculated under the black-scholes model, Delta, is generally used as a measure of exposure to the underlying asset, but can also be used as a probability that the option will expire in the money.

The absolute of Delta (non negative value) gives said probability. A call contract with Delta 0.75 has a 75% chance of expiring ITM. A put contract with a delta of -0.3 has a 30% chance of expiring ITM.

Probability of expiring In the Money

So, what are the chances of our Up and Down contracts expiring ITM? The Up contract's ticker is "XBT7D_U110", meaning that it expires every 7 days and its strike is placed at 110% of the trading price at the start of the trading period.

Again looking at the Bitmex volatility index at 54.15%, the Delta of this contract over 7 days comes to 0.1087, only an 11% chance of expiring in the money. 75% volatility gives Delta at 0.1933 and 120% gives Delta 0.3119. Not the best bet however you look at it.

For the Down contracts its even worse, with Delta being -0.07458 (7.458%), -0.1431 and -0.2367 for 54.15%, 75% and 120% volatility respectively.

The likelihood that any of these contracts actually pays out any money is rather stacked against the trader. And, as I've mentioned before, only the designated market makers are allowed to short these contracts to collect the price premium.

# Are Options ever worth it?

Options trading is a wide and very mathematical discipline to master. When contracts are traded fairly (with reasonable pricing and without restrictions) options trading can be very profitable and allow all sorts of novel trades, such as betting on volatility.

However, in its current state, I personally wouldn't touch the Bitmex Up and Down contracts with a 10 foot pole. They are over priced and restricted from the ability to short. I have seen Bitmex as a generally reputable exchange in the past, however situations like this make be question that assessment.

# Contract Guide Screenshot

I tried to archive the Bitmex contract guides with both archive.fo/ and archive.org/web/, however neither worked, so I used web-capture.net/ for screenshots instead. The full screen shots can be found here: Up Contracts, Down Contracts.

### Disclaimer

**This does not constitute professional financial investment advice.**

### Reddit Notes

My original blog post with nicer formatting can be found here.

I'm also happy to take constructive criticism and amend the post if necessary.

edit: Thanks to happy__hippo for pointing out the Bitmex posts about the contracts. I've amended the article to reflect this.

submitted by matt2048 to BitcoinMarkets [link] [comments]
This was an interesting development on the part of Bitmex. They made 2 posts on their blog (1, 2) explaining the situation. Although, the blog posts weren't posted on the website announcement feed nor (to my knowledge) on their twitter, so many people (including myself) missed them.

While the contracts came with the usual Bitmex explanation of specification and example, what struck me was the fact that:

- Throughout the whole contract guide there wasn't a single reference to "Options", despite that being the nature of the contacts.
- Traders aren't allowed to short them - "Only the BitMEX anchor market maker can be net short".

We now have the issue of a contract that many traders will have no idea how to price, that is consequently trading over 10x higher than fair value, and only the market makers are allowed to short.

European style options contracts are generally prices using the Black-Scholes model, which is used to calculate the fair price of a contract along with measures of its sensitivity to various factors such as underlying price and volatility (known as Greeks).

Options Fair Pricing vs Current Pricing

At time of writing the Up contract (XBT7D_U110) last trade price is 0.00300 BTC (~$25.57), with 2.89 days until expiry. The Bitmex historical volatility index is currently 54.15%, strike price is $9500 and Bitcoin is $8530.

The black-scholes calculator suggests that the fair price is actually $1.916. And that is the calculation for a 1 Bitcoin contract. Where as the Bitmex contracts represent 0.1 XBT each. Making the fair value $0.1916, rather than the current $25.57. Which is a bit insane.

What if we use a higher value of volatility for our calculations, will the price be a bit more reasonable? Similar contracts trading on a different exchange have an implied volatility of ~75% annualised. This gives a fair value of $1.351 for each Up contract.

I've also occasionally seen Bitcoin volatility reach up to 120% or higher. This value still gives a fair value of $7.870.

In other words, even by the craziest stretch, the Bitmex contracts are trading way higher than their fair value - and only the Bitmex designated market makers are allowed to short.

One of the "Greeks" calculated under the black-scholes model, Delta, is generally used as a measure of exposure to the underlying asset, but can also be used as a probability that the option will expire in the money.

The absolute of Delta (non negative value) gives said probability. A call contract with Delta 0.75 has a 75% chance of expiring ITM. A put contract with a delta of -0.3 has a 30% chance of expiring ITM.

Probability of expiring In the Money

So, what are the chances of our Up and Down contracts expiring ITM? The Up contract's ticker is "XBT7D_U110", meaning that it expires every 7 days and its strike is placed at 110% of the trading price at the start of the trading period.

Again looking at the Bitmex volatility index at 54.15%, the Delta of this contract over 7 days comes to 0.1087, only an 11% chance of expiring in the money. 75% volatility gives Delta at 0.1933 and 120% gives Delta 0.3119. Not the best bet however you look at it.

For the Down contracts its even worse, with Delta being -0.07458 (7.458%), -0.1431 and -0.2367 for 54.15%, 75% and 120% volatility respectively.

The likelihood that any of these contracts actually pays out any money is rather stacked against the trader. And, as I've mentioned before, only the designated market makers are allowed to short these contracts to collect the price premium.

However, in its current state, I personally wouldn't touch the Bitmex Up and Down contracts with a 10 foot pole. They are over priced and restricted from the ability to short. I have seen Bitmex as a generally reputable exchange in the past, however situations like this make be question that assessment.

I'm also happy to take constructive criticism and amend the post if necessary.

edit: Thanks to happy__hippo for pointing out the Bitmex posts about the contracts. I've amended the article to reflect this.

As I read through your blog I had the impression its a crowdfunding platform

it started as the first blockchain crowdfunding platform

sure i'm happy to give the little bit of a historical approach, is probably interesting

i think it's more accurate to described it as a community-owned asset marketplace

or other hedge funds

or is this only the case of the worldchanging projects?

but i think that this is a great model

the whole way that world works need sto be radicaly rethought

oh yeah, look at the @wires diagram, we used this at a private crypto-investor event last night

we've deployed on test net so far

ethereum as a technology actually presents several problems for us at this point

insofar as we are actually bringing in large money from the existing fiat ecosystem

around existing real partner funds

so its less hypothetical

more real assets

Your concept reminds me partly of bancor, yet you are longer around as I think. How does the calculation of a crypto fund work? It is smart contracted, so will there be some kind of algorythm?

What are the differences to Bancor @wires

:joy:

“rescuing the rain forest” = def one of the things we want to do…

safe the planet, bro

okay

Maybe I misunderstood it totally

i did think about similar things with respect to DASH/PIVX

there are a few interesting possibilities there

most blockchains are currnetly using a top down approach for validation

but the ultimate dpos is actually bottom up

crypto => swarm.fund

fiat => bitadel managed fund

I am honest, I still didnt exactly get the differences to Bancor or Iconomi

but I see this three projects as very similar. But probably the details are much different

but I cant see it right now.. maybe you can point that more out? :slightly_smiling_face:

that Means I could combine Bitcoin and Dollar?

as a Hedge?

the big fund is made up out of smaller funds, holding different asset classes

obv. different classes require different processes (buying a house, vs trading OTC comodities, vs trading cryptos)

if that is the main reason...

before the cyrpto ICO starts we run a bitcoin suisse round

or can indiciduals make their own basket of tokens

than swarm

that are already profitable

https://www.youtube.com/watch?v=5PfoBJ8zFOo

Thanks you to everyone for participating.

enjoyed talking to you guys and will lurk around on this channel, seems very interesting, ark (edited)

BTC historical volatility. As per SP500, we computed the historical volatility as the standard deviation of returns (30-day window) for the perpetual contract. We also computed the exponentially weighted moving average (EWMA), building on our previous article regarding historical volatilities [1]. BTC options implied volatility The BitMEX 30 Day Historical Volatility Index tracks the rolling 30 day realised volatility by using daily 10:00 GMT to 12:00 GMT 1 minute Time Weighted Average Prices on Bitfinex for Bitcoin / USD. The product is quoted in annualized volatility % points and investors make or lose 0.01 Bitcoin per 1% point move. This is an updated, more robust, and open source version of my 2 previous scripts : "Implied Volatility Rank & Model-Free IVR" and "IV Rank & IV Percentile". This specific script provides you with 4 different types of volatility data: 1)Implied volatility, 2) Implied Volatility Rank, 3)Implied Volatility Percentile, 4)Skew Index. The standard deviation of daily returns for the preceding 30- and 60-day windows. These are measures of historical volatility based on past Bitcoin prices. When the Bitcoin options market matures, it will be possible to calculate Bitcoin's implied volatility, which is in many ways a better measure. How do we calculate the volatility? It uses the standard deviation of the daily open price for the preceding 30-, 60-, 120- and 365-day windows. These are measures of historical volatility based on past Bitcoin and Litecoin prices. Which sources are used? Bitpremier uses the CoinDesk API for querying historical Bitcoin data used in the ...

[index] [21876] [1868] [22803] [17670] [18029] [17224] [19483] [18190] [354] [14647]

Please tune till end. This video is unavailable. Watch Queue Queue This video is unavailable. Watch Queue Queue. Watch Queue Queue This Beginner vedios are for aspirants who are interested to learn and start with options In this 1st set of vedios will publish the following 1.1 Introduction to Options 1.2 Starting with Long ... Try watching this video on www.youtube.com, or enable JavaScript if it is disabled in your browser. Try watching this video on www.youtube.com, or enable JavaScript if it is disabled in your browser.