What’s Cool about Deribit?

What makes Deribit useful for investors? Even if you don’t trade futures/options, the information Deribit generates can be used in a variety of ways to help improve your crypto portfolio and understand what’s happening to the crypto economy.

Deribit publishes implied volatility. Implied vol shows us what investors expect volatility to be, and is derived from the price of options. If you navigate to the options page of Deribit, you can see a list of checkboxes for displaying data in the option chain including the last price, volume, and open interest. Make sure the checkbox for “Implied Volatility” is checked, then view the implied vol numbers displayed beside each option (bids and offers).

 

Deribit also shows you the forward curve, which shows the difference between prices today and for the future. The forward curve is important to understanding market expectations, whether the curve is contango or backward. If you navigate to the futures trading page, you can see the current slope is slightly upward, meaning future prices are higher than spot prices. For example, the current spot price for bitcoin on Deribit is 6416, the December contract is 6458, and the March contract is 6468.

You can use Deribit to hedge your bitcoin risk, and you can speculate wildly if you like too. Deribit allows users up to 100x leverage on futures contracts, so if you really want to crank up your risk, and try to hit some home runs, Deribit is a good place to speculate. You can take a bullish or bearish position, by going long or short. Deribit users can also use options strategies to gain leverage such as buying out of the money puts and calls.

MCAN MKP Review, Executive Departures

MCAN is a Mortgage Investment Corporation (MIC) traded with symbol MKP on the TSX. Its mortgage portfolio contains a mix of construction loans and single family mortgages. According to their most recent investor update the loan portfolio is worth $919 million, with $580.5 (63%) in construction loans, and $338.5 (37%) in single family mortgages. The construction portfolio is basically half in Ontario, 40% in BC and 10% in Alberta. The single family portfolio is 61% in Ontario, 18% Alberta, and 10% in BC. MCAN’s stated goal is to focus more on funding single family home loans.

In times when real estate prices fall, MCAN will be more risky because their construction loans will sour at a higher rate than single family loans (especially insured single family loans). So investors need to keep in mind that when real estate prices fall, MCAN will feel the impact more than most.

But what investors should be more concerned about is the recent departures of both the CEO and the CFO. Rumour has it that these departures are unrelated, but investors should be very concerned about the specific reasons. MCAN has appointed an interim CEO, Karen Weaver, who is an experienced and respected leader. But otherwise MCAN has not provided much explanation to shareholders, and so the share price of MCAN has dropped sharply since the CEO departure was first announced.

At the time of writing, MCAN shares are trading a bit above book value, with a forward yield of 9.14% which is very high, so investors should wonder whether this is a trap rather than a chance for good value.

MCAN is scheduled to release quarterly earnings in the coming days, and if any reader has more information on MCAN, please leave your comments to this post.

Bitcoin Volatility Tracking

Crypto-currencies are volatile, but the market is changing. The volatility of bitcoin has been steadily decreasing throughout 2018 trading, and I expect this trend to continue. This post will evaluate some easy ways to track volatility.

When evaluating volatility, we should distinguish historical volatility from implied volatility. Generally, financial volatility refers to the variation of a trading price series as measured by the standard deviation. But looking backwards using historical data only tells us what we already know, this is called Historical Volatility. But in order to get a current estimate of future volatility, we need to examine implied volatility. Measuring Implied Volatility is done by using an option pricing model such as Black-Scholes, where we can input available data to isolate the volatility implied in an option’s price.

You can build your own option calculator using excel, or you can use pre-built calculators such as the CBOE option price calculator. Either way, once you have the option’s price, strike price, and expiration date, you can solve for implied volatility.

Instead of making these calculations yourself, you can also use site like BitVol, which keeps a running tally of bitcoin price volatility.

For an even better estimate of volatility, I suggest using Deribit, which is a bitcoin derivatives exchange with some cool features. By navigating to Deribit’s options market, users can view option price chains that include the current implied volatility associated with each option price.

 

 

The image above crudely shows where to find the implied volatility level associated with each specific option price. You can also view implied volatility for both current bid prices and ask prices of both puts and calls.

This information is super useful for option traders since, depending on your strategy, you’ll benefit from buying options when volatility is low and selling options when volatility is high. Option traders can also isolate volatility by using option spreads that neutralize price movements of the underlying.

What are the current trends in bitcoin volatility?  At the time of writing (November 2018), volatility is falling. Deribit users can also navigate to the Historical Volatility tab from the options market page. The graph displayed from this page shows historical volatility over the past 30 days. From a high of 41.87% at the beginning of October 2018, 30 day historical realized volatility has now fallen to  a low of 14.45%. At the time of writing, bitcoin implied volatility is still hovering around 40% on average for strikes expiring in 30 days. This means traders are still willing to pay for the expectation that bitcoin will remain relatively volatile.

Odds of the 1979 Skylab Fall to Earth

This image of Jackie Gaughan at the El Cortez in downtown Las Vegas was taken in 1979. It’s a popular photo of the legendary casino owner and is featured numerous places online and can be found hanging near the present day sports book at the El Cortez.

Jackie Gaughan is pointing to the odds of when the Skylab space station will fall to earth. Skylab was a United States space station launched and operated by NASA. In 1979 it fell back to Earth amid huge worldwide media attention.

The first thing I notice from this photo is the odds are expressed as fractions. Today, most odds found in Las Vegas sports books are posted using “American” “Moneyline” format.  I wonder when American odds became widely used, and before that time what other odds formats were used in Las Vegas?

Using this image, we are able to calculate the spread the sports book was charging for this prop bet.  I notice there is no bet for “Any Other Day”, so the odds might tell of us if this outcome meant a push or not. We might be able to tell if this was the case based on the sum of all other outcomes.

Date Odds
07-Jul 1000.00
08-Jul 50.00
09-Jul 10.00
10-Jul 2.00
11-Jul 1.00
12-Jul 1.40
13-Jul 2.00
14-Jul 15.00
15-Jul 50.00
16-Jul 300.00

I’m pretty confused after looking at these odds. If Skylab falls on July 11th (which it did), does that mean the book pays nothing out? The odds of 1/1 dissuades anyone from betting on this outcome, thereby making July 11th, the outcome where the sports book keeps all the bets? It could be that the Skylab was very likely to fall on July 11th, and the odds of Skylab falling on any other day other than July 11th were remote. A quick Youtube search of Skylab reveals several contemporary broadcast news stories covering the re-entry, and it seems pretty clear that the location and time of re-entry was fairly certain.

I also notice beside the betting on which day Skylab will fall, there is also a market on which US state it will fall on.  It turned out that Skylab actually fell on Western Australia, so does that mean all bets where returned?  There is not an “Any Other Location” bet listed.

This historical bet should be instructive to current betting operators. Jackie Gaughan was known as someone willing to post fun bets and bets with good value. Posting a market on the day Skylab will fall would have been a fun way for the casino to get some publicity. Today however, barely any sports book in Vegas posts bets like these. Even the El Cortez itself no longer runs its own sports book, they have outsourced their odds to Stations. It seems the sports book operators of today are willing to sacrifice some of their margin in the hope of generating more stable rates of return by only posting odds on well known liquid bets. This might help keep volatility under certain bandwidths, but at the expense of profits. Volatility is a bookmaker’s friend, and a bookmaker willing to step out of the mainstream is better able to take advantage of their ability to spread risk over a large number of bets, compared to gamblers who are taking the risk.

By the way, if this image was taken sometime between January and July 1979, we know the AFC Championship was won by the Pittsburgh Steelers when they defeated the Houston Oilers, which would have paid off at 8/5 = 1.60

How Much Does FanDuel Rake?

Tonight I entered a FanDuel contest, how much rake I am paying?

I entered a $1 GPP contest with a $3,000 guaranteed prize pool, the maximum entries allowed is 3,571, which means the maximum entries is $3,571 with a pool of $3,000. So to determine the rake for FanDuel for this contests, we take the amount to be paid out divided by the maximum amount of entries which is 84%, minus one equals 16%. This means that FanDuel will pay back 84 cents of every dollar wagered in the pool. The amount we are paying in rake is equal to 16 cents per $1 entry.

With GPPs, it would be better as a user if less lineups were entered as the GPP would be shared amongst fewer users. I suspect the contest I entered tonight will be fully subscribed; and if its not, then the game within the game becomes finding GPPs where the entries are so low that the GPP is higher than the theoretical payout based on the number of entries.

If you think my calculation is wrong, I’d like to hear from you. Please comment below with suggestions.

Poloniex to remove margin lending/borrowing for US customers

Poloniex will disable margin lending and borrowing for US customers by the end of 2018. Part of dealing with a US regulated exchange such as Poloniex is they must be compliant, and this often means less access for customers. Poloniex users will wonder how liquid their margin market might become after this change, and how a shallower margin market will impact overall exchange liquidity.

From Poloniex:

By the end of the year, we’re taking steps to remove our margin and lending products for US-based customers. These changes are part of our ongoing commitment to ensure that Poloniex complies with regulatory requirements in every jurisdiction … We will provide more communication in the coming weeks about the final date but it will be by the end of the year and encourage customers to take steps to unwind margin positions at their convenience. Existing loans will remain open and continue to fund positions and earn interest for their previously specified duration.

US dollar coin vs US dollar tether

What are “stable coins”? Stable coins are a weird part of the cryptocurrency world. These blockchain based currencies seek to anchor their value with some widely used money such as US dollars (USD). US Dollar Tether (USDT) and US Dollar Coin (USDC) are two such stable coins.

USDT is traded on a few exchanges such as Bitfinex and Poloniex, and USDT is supposedly backed by USD in bank accounts, but this cannot be verified and no public audit has been released. USDC on the other hand is being traded in a few exchanges also, and is being issued by a clearinghouse created by Circle (the owners of Poloniex).

The principals at Bitfinex are connected to those at USDT, and Bitfinex has been the major conduit for USDT adoption. Since releasing USDC, Poloniex has listed a USDT/USDC pair for users to trade. I think this is fascinating because now we’ll have a place to compare value directly. This may cause USDT to “break the buck”. At the time of writing, four days into trading, the rate stands at 0.985 and has been falling a bit each day. The issuer of USDT better look for ways to become more transparent or else may need to find ways for users to redeem USDT for USD. If users can exchange USDC with USD directly at Circle, then USDC might become much more functional.

USDC FAQ

 

Ryder Cup Odds 2018

Whether you love watching Tiger Woods and Phil Mickelson giving high fives or if you care about which millionaire golfer has the best celebration dance, the Ryder Cup 2018 is upon us. The Ryder Cup is a golf team match play event held every other year between players representing the United States and Europe. Typically, the best players from each continent will tee off against each other starting with fourball and foursomes on Friday & Saturday, and then singles matches on Sunday. Tiger Woods, Phil Mickelson, Rory McIlroy, Justin Rose, will all be fist pumping and cheering along with fans.

Below is my review of Ryder Cup odds for 2018.

 

Bodog Sports Interaction CoinRoster
USA 1.90 1.68 1.90
Europe 2.20 2.34 2.20
Draw 12.00 13.00 12.00
Spread -6.42% -9.95% -6.42%

 

The “Spread” row listed in the table above shows the theoretical vig implied in the odds. The math for this is pretty straight-forward, take 1 divided by the decimals odds, then sum the total of all odds. e.g. 6.42% = 1- [(1/1.9)+(1/2.2)+(1/12)]. From the data in the table above, Bodog & CoinRoster have the best odds overall because their combined implied spread is 6.42% compared to 9.95% for Sports Interaction, even though the odds Sports Interaction is posting for Europe and the Draw are better, the low odds provided to USA make up the difference.

USA is the favorite this year, but only marginally. Europe are the slight underdogs. A $1 bet on USA will pay $1.90 if they win, but a $1 bet on Europe will pay $2.20. This makes sense considering USA has a deeper bench of the world’s top golfers including Justin Thomas and Dustin Johnson. Europe does have the best player in the world right now in Justin Rose, as well as Rory McIlroy, but if the weakest players on the USA might be Bubba Watson and Phil Mickelson, Europe has to compete with lower ranked players such as Thorbjorn Oleson. Europe has a few cagey veterans such as Sergio Garcia, Henrik Stenson, and Ian Poulter, but those players are not at the top of their game’s and it will be tough for them to compete head to head with the likes of bombers such as Brooks Koepka.

To compare the odds from a variety of sports books, click here for Odds Checker golf.

Deribit Portfolio Margin

This post will describe the Portfolio Margin system used at Deribit, a bitcoin derivatives exchange. Portfolio margin is a risk-based margin policy that aligns margin requirements with the overall risk of a portfolio. Portfolio margin usually results in significantly lower margin requirements compared with the sum of margin requirements on individual positions. If a portfolio is long and short, portfolio margin can allow the risk of positions to be “netted off” which may result in an lower overall margin requirement.

I’m most familiar with the CME SPAN margin system which is used to evaluate the risk of futures and options portfolios, but the same general principals apply to Deribit portfolio margin.

Deribit users can request to have portfolio margin applied to their account by e-mailing support@deribit.com. To qualify, Deribit users must maintain a minimum net equity of at least 0.5 bitcoins, must demonstrate some experience trading options, and declare to have understanding about the concept of portfolio margin.

Here is how Deribit determines portfolio margin:

  • maximum price move of +/- 10.00%
  • maximum implied volatility change of SQRT (30/days to expiration)*27.00%. Example: options expiring in 30 days: IV change of maximum 27.00%, options expiring in 15 days: IV change of maximum SQRT (30/15)*27.00%
  • Contingency component of 0.5% of underlying value of all options in portfolio. Example: you have 200 options in your position (long and short), 0.5% of 200 BTC = 1 BTC is added to the portfolio margin calculation.
  • Contingency component of 1.00% of underlying value is added for offsetting futures. Example: you are long 100 BTC in Future A, and short 100 BTC in Future B, then 1.00%*100 BTC will be added to the portfolio margin calculation.
  • Contingency component of 0.00% for VEGA’s offsetting in different expirations. Example: you are net long 10 VEGA in expirations A/B/C, and net short 10 VEGA in expirations D/E/F, we will add a contingency of 0.00% thereof to the portfolio margin calculation.
  • Initial margin is Maintenance Margin + 30%. Example: If Maintenance Margin is 10 BTC, Initial margin will be 10 BTC+30% = 13 BTC.

Deribit also notes that when liquidating positions, it will start with futures first. This is presumably because the futures contracts are more liquid. Deribit also says that when margin levels are breached, they may liquidate futures first, but may also add futures positions if it reduces overall portfolio risk. For example, if a portfolio is net short puts, Deribit may add short futures instead of buying back puts to achieve minimum margin requirements.

Enbridge Income Fund Good Deal or Bad Deal?

Enbridge (ENB) has announced this morning it will acquire all the outstanding shares of Enbridge Income Fund (ENF). The deal will see each common share of ENF exchanged for 0.735 of a common share of ENB and $0.45 cash. With ENB trading this morning at 34.10, this deal is worth $25.5135 for each ENF share.

In addition, ENF shareholders will be entitled to ENB’s fourth quarter dividend and ENF’s monthly dividends through to closing of this deal. If the deal closes as expected before the record date for Enbridge’s fourth quarter dividend, expected to be November 15, 2018, to be paid in early December, an ENF shareholder will receive, as an ENB shareholder, the ENB December Dividend and the ENF dividend to be paid in November to ENF shareholders of record on October 31, 2018. In the event the Arrangement closes after the record date for the ENB December Dividend, the Cash Component will be increased for the ENB December Dividend based upon the Agreed Exchange Ratio less any dividends paid by ENF to its shareholders after November 30, 2018.

This deal is part of a broader industry trend for pipeline companies to buyout their master limited partnership units after tax changes and as the investment vehicles become less popular. Enbridge has previously announced the buyout of Spectra Energy Partners.

Is this a good deal for ENF shareholders?  Probably not. But tax rules are changing and it has become less tax advantageous for pipeline companies to list MLPs or income trusts, so the parent companies are buying back their listed pipeline MLPs.

Enbridge Announces Definitive Agreement to Acquire All Public Equity of Enbridge Income Fund Holdings Inc., Achieves Significant Milestones Toward Corporate Structure Simplification

CALGARY, Sep. 18, 2018 (Canada NewsWire via COMTEX) — Enbridge Inc. (ENB) (Enbridge) and Enbridge Income Fund Holdings Inc. (ENF) (ENF) today announced that they have entered into a definitive arrangement agreement (the Agreement) under which Enbridge will acquire all of the issued and outstanding public common shares of ENF (the Arrangement), subject to the approval of ENF shareholders.