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Comment by d--b | Hacker News Reader

People writing those article should know better, it's the wall street journal for god's sake. Buying a call option doesn't mean you're bullish that the future is going to trade up to that point. It could be a hedge for a short position or a way to go gamma-long or a way to make a structure cost-less, or really some other trading idea.

The point is that if the price goes up, the call option price goes up faster, and then the trader can sell it before it reaches 50k. Liquidity though may be an issue.

EDIT: what matters is that it is _possible_ that bitcoin goes to 50k next year. And since it is possible, people need to take that possibility into account in their strategies. It's like S&P option strike range for dec18, it goes from 1700 to 3100. Is it likely that SP price goes down to 1700 in the next year? no, but it's certainly possible.

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A call option also means someones else took the other side of this trade. Who sold $1 million dollars worth of December 2018 Bitcoin $50K call options?

Also there's a back of the envelope implied volatility for Bitcoin here: on a $3k call option premium 12 months out (so breakeven on this "bet" is actually $53,000) Bitcoin implied volatility of around 120%? Not that equity option pricing model theories apply to Bitcoin, or even work as expected on equities for that matter, but it's interesting to see an implied volatility number regardless. Looks like Delta less than 10. With Futures already 3 months out at $17,000 it would seem like whoever sold this call option for $1 million could hedge (not perfectly hedge) the trade for less than $1 million. Oddly enough, both the buyer and the seller could end up profiting on this option trade.

I agree this article is very bad, it feels like a paid PR article advertising for the trading company not actual news.

Someone who's already long a ton of bitcoin could write those calls without adding any risk, collecting a little bit of yield and sacrificing only the extremely-far-out-of-the-money potential upside of $50k+ on his long bitcoin.

The implied volatility at which this option traded is pretty irrelevant for helping us understand the option market as a whole, since it's so far out of the money. We don't have much information about what the upside skew would look like. And due to vanna, that delta calculated off that implied volatility is irrelevant too.

You're right. And I agree, the missing info about the contracts and the overall derivatives market here plus the expiration and strike being so far away makes calculating IV or delta or vega or convexity or well calculating anything pretty irrelevant and has little to zero practical use.

Plus we are talking about Bitcoin! so none of this is relevant. The old option theory bullshit has even less rigor beyond fun mental exercise. I still think it's interesting and gota start somewhere, and we'll see how things develop in this market. I did try to qualify in my comment writing something how calculation not really applicable to Bitcoin and doesn't even work on equities properly. But again you're right and I should have worded my comment differently, probably a bad lazy old habit to even use weird finance terms on non-finance forum like HackNews, so maybe could have said something like 'wow interesting to see someone paid 20% of the current price for an option with a strike that has bitcoin gaining +200% in the next 12 months'?

I would guess this is some sort of covered call as you suggest. It's only 275 bitcoins and a 20% premium on the spot price seems like a decent yield for so far out the money. I'm not a bitcoin trader but it's my understanding from what I've read there was no short side price discovery until very recently when derivatives started trading so volatility has no historical nor frame of reference. Bitcoin options could be super inexpensive deal right now or way overpriced there's no basis to say either way but there does seem to be enough inefficiency across various markets for arbitrage if someone wants to make the effort.

> The old option theory bullshit has even less rigor beyond fun mental exercise.

Well, it actually tells you how to hedge and thus replicate the option. That's quite valuable in practice (even if it needs modification from pure theory), despite Taleb's rants.

Hedging is a valuable practice. But my point was the old option modeling, Black-Scholes for example, doesn't work in Bitcoin markets: firstly because Bitcoin markets don't have the same structure or offer the same inputs as equities markets. And secondly because equity option theory doesn't even work in real world equities if we're being honest. Options do a decent job as rough short term guidelines for hedging and replication, in a few corners of the market that have gained enough efficient liquidity in options (such as large indexes and small number of single names) but hedging beyond there is an active challenge. One obvious sign maybe that option models don't work so well outside of their assumption-filled theory is how the options market makers still need so many humans involved in subjectively managing the risk on their books every day - if a theory and its models are strong and "tells you how to hedge" why can't computers calculate the next move and hedge risk with a click of a button automatically? Hedging in bitcoin would be questionable (if not laughable) right now, you can still do it of course and maybe shoddy guess hedging is better than nothing? But what's a fair price for bitcoin insurance over the next day, month, year?

The problem is that the volatility of BTC should be priced off tail risk more than gaussian drift, and that's not a rigorous part of the theory. Black-Scholes certainly doesn't characterize the tails very well.

Nice comment, you seem like you know your stuff. My opinion is without fundamentals or historical or correlated assets here you can't price tail risk beyond throwing a dart. Look at the Futures margin reqs, it's like 40%. A ridiculously high number and that's probably still a compromise because they halt trading for the day around 20%, otherwise I imagine there would be almost no margin given. Price of tail risk is not being priced.

Given the realized vol of bitcoin, 50k is not very far out of the money. Bitcoin doubled between end of November and mid December. And it's 20 times the value it was a year ago...

> I agree this article is very bad, it feels like a paid PR article advertising for the trading company not actual news.

The number of times LedgerX was mentioned made me suspect that immediately.

Their volume is abysmal. Nobody trades there. They know they're missing out, and they know they're running out of time before the Bitcoin craze is all over. They'd like to make some money before that happens.

Though to be fair, going long a call is fundamentally a long delta (=bullish) trade on the stock (unless you hedge, in which case it's long vol)

You are right. its most likely a exotic call option.

Click bait!

WSJ is owned by Rupert Murdoch now. https://en.m.wikipedia.org/wiki/The_Wall_Street_Journal

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