Table of Contents
- The FTX Exchange
- Introduction to Options
- Put + Call
- MOVE Contracts
- Margin & Leverage
- When to trade MOVE
You can sign up to FTX with this link and get a discount on fees.
The FTX Exchange
Their fast come up is due to both their background and innovation. Originally, Alameda Research was known for making markets on BitMEX and earning two spots among the top 10 most profitable traders (notional). As traders they knew what BitMEX and other exchanges were missing and hence they created their own: FTX.
They’ve created a wide variety of innovative products such as perpetual contracts for indices (ALTPERP/MIDPERP/SHITPERP/PRIVPERP), leveraged tokens and now MOVE contracts. The latter gives traders the ability to trade a specific options strategy in an easier, more accessible and more liquid manner through a futures contract.
We, at Cryptonary, firmly believe that in order to trade any financial product, due diligence and deep understanding of the product itself is crucial.
Disclaimer: Please note that none of this constitutes financial advice and any trades you take are at your own risk.
Introduction to Options
Options have become the talk of the town in crypto, similar to how futures rose to popularity in 2017. To understand how MOVE contracts work, it’s necessary to know some of the basics in options.
Below are the four different type of trades one can make using options and their respective payoff structure.
What you need to keep in mind is the following:
- An option buyer (long) is betting on incoming volatility. A long call bets on upcoming upside movement while long put bets on downside movement.
- An option seller (short) is betting on the opposite: against volatility in a certain direction.
The option buyer has the right but not the obligation to exercise the contract, in return for this flexibility a premium is paid at inception and that constitutes their entire downside. This premium is held by the option seller who must sell the option should the buyer exercise it. If no or low volatility takes place, the option seller gets to keep the premium.
Note that options sellers have practically unlimited downside and limited upside, while option buyers have limited downside (premium paid) and unlimited upside. While this structure may seem in favour of the buyers, it is not.
Buying options is what we call a positively skewed strategy; meaning it delivers frequent small losses and few large wins. Selling options is the opposite: negatively skewed; frequent small wins and few large losses.
If an individual is already exercising a positively skewed strategy such as trend following, adding a negatively skewed one will, in theory, further diversify their portfolio.
PUT + CALL
MOVE contracts are based on a specific options combination called a “straddle”.
This is when a trader is unsure of price’s direction but believes there is high incoming volatility and hence buys both a call and put. Premium paid is higher but as long as price shifts one way they’ll make money. The straddle seller is betting that volatility will be relatively low and as long as price remains in a certain range, they’ll get to keep the premium.
If price at expiry is outside of the [8000-8500] range, the straddle buyer will make a profit. If price remains in that range, the straddle seller will get to keep the premium.
There are three different types of MOVE contracts that allow to bet on Bitcoin’s future volatility: daily, weekly and quarterly. The difference between each is their time to expiration.
At inception an option is worth its [intrinsic value + time value]. The more time left to expiration the bigger the chance for an upcoming move. Conversely, the closer time gets to expiration, the time value becomes worth less and hence price converges to its intrinsic value. In fact, the price of a MOVE contract at expiration is the amount by which Bitcoin has moved in that day (daily contracts).
This value decrease is known as time decay and is denominated by the greek letter θ (theta).
Margin & Leverage
Similar to other futures contracts you can use leverage to trade these.
SHORT: You’ll need to post as much margin as you’d need for BTC not the MOVE contracts value.
Example: 10x leverage (10% margin requirement); Bitcoin is trading at $10,000; MOVE at $200. You need (10% * $10,000) = $1,000 in collateral per MOVE. If you had $5,000 in your account you can short 5 MOVE. The reason being that losses for shorting straddles is unlimited and hence this much collateral must be posted.
LONG: Because your loss is capped at the premium paid you only need collateral for the price of MOVE. If MOVE is trading at $200 with the example above, you can long 25 MOVE contracts [$5,000/$200].
A simple way to avoid overexposing oneself to a novel product is to create a subaccount and allocate small funds for trial/error and familiarisation.
These contracts can be a solution to many, the principle is very simple:
- Believe a large move is coming but unsure of the direction? Long MOVE
- Choppy price action? Short MOVE
You can sign up to FTX with this link and get a discount on fees: https://ftx.com/#a=Cryptonary