Deribit vs Bitmex UP contracts

Deribit users received an e-mail outlining the difference between their options contracts and the Bitmex UP contracts recently released. Here is the text of their e-mail:

Last week, Bitmex introduced a new contract named UP (Upside Profit) Contract. This contract is basically an option on BTC, exactly like the options traded on Deribit.

 

The prices of Deribit options are established by buyers and sellers in the market. Anybody can participate at any time in the bidding process, provided enough margin in the user account.

 

The Bitmex UP contracts can only be bought. There is only one party that can short the contract, which is only one market maker designated by Bitmex. This market maker seems to be doing quite well, as the price at which the contracts have been issued are around 10 times higher than the contracts with the same specifications on Deribit (the only difference being that Deribit options expire a couple of hours earlier than the UP contracts on Bitmex).

 

The buyers of the UP contracts on Bitmex must have been unaware of the fact that they could have gotten an almost 10 times better deal on Deribit. We will explain this below with an example.

 

Looking at the Bitmex UP contract with expiry date 4 May 2018 and strike price of 10250, the current ask price for this contract is 0.0033 BTC. This contract would give a payout of the difference between the settlement price and the strike price whenever the price of BTC is higher than 10250 on the 4th of May. The contract size is 0.1 BTC, meaning that a trader would have to buy 10 of the contracts to get the full difference between strike price and settlement price (if settlement price is higher than 10250).

 

Looking at the 4 May 2018 contract on Deribit with strike price 10250, the current ask price is 0.0039 BTC. At first sight, the market on Deribit and Bitmex seem somewhat in line, but the contracts on Deribit are options on 1 BTC, while the contracts on Bitmex are options on 0.1 BTC.

 

This means that a trader on Bitmex would have to spend 0.0033*10=0.033 BTC to get the same exposure as buying on Deribit a single 4 May 2018 contract for 0.0039 BTC. Thus, in this case, a buyer is 8 times better off on Deribit than on Bitmex. In other words, traders could have saved almost 90% of their investments in Bitmex UP contracts by buying similar contracts on Deribit.

 

We hope the huge discrepancy between options prices on Deribit and Bitmex cannot only be explained by the fact that there is a single party who is allowed to short sell those contracts. We believe a mistake has been made as for the issuing price of the contracts. Let’s see if the UP contracts will get more reasonable prices in the coming weeks.

RiskingTime

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