One of the latest invention in finance, the so called money formula, has arrived to both bitcoin and ethereum with options rising as an exciting new trading instrument.
Deribit dominates by far, with it handling some $100 million to $150 million in trading volumes for bitcoin, up from circa $50 million last month.
You can see Deribit is handling far more than Wall Street’s CME. LedgerX has been offering them for some time, but still hardly much volume in part perhaps because the exchange isn’t easily accessible.
Unlike Deribit which is just a logging, with OKEx a new comer, and so handling decent volumes for a newbie.
We have eth here too, but the volumes are far lower at around $10 million a day this month, up quite a bit from less than a million last month.
Options are the newest financial instrument to arrive at this space in a testament of the level of sophistication cryptos are now reaching as young bankers start becoming the new bankers.
So what are options? Well, grandpa would say it has something to do with you securing the right to buy a house or an asset, without having to buy it.
A mathematician would say options are the magic formula that changed the world:
We would say frankly we have no clue yet, not least because all this is very new to this space and at first it can be quite intimidating.
There are strike prices and bids and asks and what looks like gibberish really, but it all soon becomes semi familiar once you try them out.
Strike price is the easy one. If it doesn’t reach that price before contract expiry, then you lose the money.
Volume is probably a good indicator of maybe where you should go as a noob, although they have testnet options so you can play there first.
The most puzzling one is Implied Volatility (IV). This is a complex new parameter which does matter as unlike in margins or futures where you have to just care about price, here you have to care about IV too.
So what is it? Well Deribit has put out an explanation, but basically if you’re buying then the lower it is the better, obviously if you are in the money. As in, if the strike price is higher than current price.
Why there are contracts here with a strike price of $70 we don’t know and frankly we don’t care, but the other thing about IV is that once you are in, the higher it goes the better for a buyer and vice versa for a seller.
Why? Well presumably because you can sell the option and if IV increases that means the market anticipates a price jump and therefore is willing to pay you more for the option.
So bit simple right? Except when you enter the options game you get to read that spooky story of how some trader made 0% even though price doubled because of IV.
What that means we don’t really know, but one thing we know it means is that IV is important and therefore you should be paying attention to it.