## Coinut Vanilla Option Pricing

I’ve been scratching my head and asking my friends in an effort to try figuring out how the vanilla options are priced on Coinut.  I made a calculator in excel, but my numbers were always off compared to what the market was showing. Now I’ve finally found the “trick”.  The index that the options are settled to is BTC/USD number according to an aggregate of prices on various 3rd party exchanges.  The options themselves are traded in bitcoins and settled in bitcoins, so all the option prices need to by divided by the strike price of the option to get the value of the option in bitcoins (make the bitcoin price the denominator).

To calculate the payoff on a vanilla option, the formula is: (underlying – strike) * multiplier / strike.  For example, say the strike price is 580, the index is 600, and the contract size is 0.01, the intrinsic value of a call is (600 – 580) * 0.01 / 580 = 0.000345.

After getting passed this very basic challenge, I went back to my calculator to see what the implied vols are.  Turns out they are huge, 65% implied volatility for at the money 3.6 weeks in the future. Wow.

## Coinut Binary Liquidity & Implied Vol

One aspect of the Coinut trading platform that is starting to get on my nerves this morning is the inability to modify an open order.  It seems the system does not provide the manual ability to modify an open order.  To change an existing order, the user must cancel the order and re-enter a new one instead. This make it a bit cumbersome to manually work an order book.

It would also make the prices more intuitive if you could choose to view the prices with the first two decimal places removed.  Sometimes it takes second to see that the price of an option is 0.00010 compared to 0.00100.  The difference with the binary implied probability is 1% compared to 10%, so its a big difference.

The market for binary options on Coinut seems to be more liquid than the vanilla options.  So in effort to get my first trade, I placed some aggressive 1 lot orders in a few weekly binaries this morning. Hopefully someone takes me out.

This morning I also took a quick look at implied probability at some of the options I’m making markets in. Considering the May 21st (1 week) binary 464 calls with the underlying at 455.81.  The current market is 0.002097 bid / 0.003000 offer. I am the best offer. The bid price represents implied volatility of 17.09% and the offer price represents implied volatility of 26.92%.  The VIX is currently at 15.04%. So this is very interesting for bitcoin traders.

## Coinut Option Pricing

Coinut is an bitcoin options exchange I’m trying out. So far I’ve placed a few orders, but haven’t got filled on anything yet. If you would like to open a Coinut account, please us my referral link. There is no cost to you by using my referral link, however, I receive 10% of the fees you generate 🙂

I managed to make a deposit without any problem by using the funding tab and sending my bitcoins to the address Coinut generates for each user. I deposited 0.20 BTC and received a bonus of 0.0048 BTC just for signing up.  I think that’s a pretty nice deal!

Typically when I’m using options, I’m on the sell side. I usually use options to generate additional income by writing premium. Most of the time I’m hedging a position. I currently own about 25 BTC held between a few different bitcoin based investments, and I also purchase \$500 CAD worth of bitcoins each week using the Coinbase auto purchase plan.  So I’ll be writing puts and calls on both binary and european options on the Coinut exchange. My initial strategy is to sell the most out of the money strikes 1 week in advance for both calls and puts.  The maximum number of puts I am willing to sell is 1 BTC (that is 100 contracts on Coinut) and 10 BTC (that is 1,000 contracts on Coinut).  I’m not sure I’ll get close to either of these levels however based on the current liquidity. I’m going to place orders in 10 contract sizes.

I’ll talk about margin requirements in a later post, but in this post I’ll just describe how to enter an order and what the pricing looks like. Choose the Trade tab from the top main menu. The default is binary options, so those strikes will show up in the main part of the Trade screen. On the left hand side, you’ll see the details of your current balances. Below your balances, you’ll be able to toggle between binary options and “vanilla” options as they are called by Coinut. “Vanilla” options are european style options.

There are a few expiration dates to choose from. With Coinut binary options, users can choose between options that expire within a few minutes out to options that expire in over a week. The short term nature of the binary expirations listed is probably related to the likely target market for these options. There are many binary option trading sites online, however most of them are dealer markets where users buy options from the “house” instead of by exchange. This makes them more like a gambling product than a financial derivative. Any trader who knows how to price options will find that they can never get a good price in any option they purchase on a binary options site which is a dealer market since the dealers know how to price these options too, the platform is acting like a bookie and not a market maker.

For the binary options, I’ll be choosing the options that expire in 1.3 weeks, which is the longest expiration currently listed at Coinut. The option prices are listed with bids and asks with strike prices listed down the middle and with call entry screens listed below on the left and put entry screens listed below on the right.

The first thing that I notice as I’m looking at a list of prices and strikes is the bids & offers being posted for all strikes between 444 and 464. At this time, bitcoins are at 453 according to Coinut’s index, which is updating in real time just above the list of strikes for easy reference. There are other strikes listed outside of the ones with active bids and offers, and I’m not sure what the policy of the exchange is regarding which strikes are to be listed and when. An explicit policy about how new strikes are listed is something liquid exchanges post in their rules, but I’m not sure if Coinut has got to this level of detail yet as I haven’t seen a rulebook posted on their site other than the FAQ section.

The next thing I notice as I’m looking at the bids and offers currently posted is they are VERY wide. For example, with BTC currently at 453, the at the money strike for the 1.3 week expiration binary options is 452. On the call side the current bid is 0.003336 and the offer is 0.008838, on the put side the bid is 0.001162 and the offer is 0.006651. Since the contract size is 0.01 btc or 1% of a bitcoin. We can intuitively convert the prices posted to binary percentages by removing a few decimals where 0.003336 becomes 33.36% and 0.008838 becomes 88.38%. These are the prices for the call side of the 452 strike price 1.3 week binaries. As you can see, the market is super wide.

We can further analyse the prices listed above for the 452 strike price by summing up the posted bids and offers and then getting an idea of implied vol and theoretical price. I’m going to use an options calculator posted on the Drexel University Math Department simply because it lays out the prices and greeks that I’ll be needing in an easy to read format with the right number of decimal places for my purposes. Moving to the options calculator, I’m using a 452 strike price, an expiration date of 0.025 years (1.3 weeks / 52), an underlying price of 453, an historical vol level of 1.53% which comes from btcvol.info, a dividend rate of 0, and an interest rate of 1.825% which comes from the current 30 day funding rate on Bitfinex. On the calculator settings, I’m setting the “precision” rate to 6 to match the number of decimal points used on the Coinut system.

The calculator spits out a call value of 50.9360, which we can convert to a Coinut contract price of 0.005094. With the same option trading at 0.003365 bid & 0.008860 offer, you can see how the market is very wide and with only 1 open interest for all strike at this expiration date, very dry. At least there are bids and offers posted.

If you would like to open a Coinut account, please us my referral link. There is no cost to you by using my referral link, however, I receive 10% of the fees you generate.

## Bitcoin Options Coinut Initial Thoughts

I’ve been investing in bitcoins for the past year, but I have expertise in derivatives, and I’ve been wishing that a bitcoin derivatives market would emerge soon. I have various bitcoin investments such as funding loans on p2p sites, funding margin on fx sites, and cloud mining pools, but the financial system for bitcoin is still nascent. Benchmark rates don’t really exist at this point, although a bunch of different bitcoin price indexes exist.

I’ve been watching a site called Coinut, which is a bitcoin option exchange, to see whether any liquidity will develop. But it seems over the past few months that liquidity hasn’t really picked up. Instead of waiting on the sidelines, I’ve decided to open an account on Coinut and start making markets myself.

Opening an account on Coinut is fairly easy, you just need a username, password, and e-mail address. Seems like each new account gets a small bonus of bitcoins just for signing up. Once I confirmed my account, I logged in and noticed 7 menu choices on the top main menu of each page. Tutorial, FAQs, Trade, Funding, History, Profile, Audit.

Starting with the audit tab, the audit page lists some details about the user balance and how much is in the Coinut wallet. There is also an audit time lists, but today it looks like the last “audit” was done 5 months ago, that doesn’t give me much confidence!? Seems like the audits are done using a Merkle Tree, which is a type of cryptology that I’m not familiar with, but I should do more research on.

The Profile tab allows users to change their password and enable two factor authorization, they support Google Authenticator.  Users can also change their e-mail address, obtain an API key for integration, and use an affiliate link which provides the referrer with 10% of the fees generated from referred accounts.

The History tab allows users to view their transaction histories and export to CSV.  The Funding tab shows the user’s deposit address which can be re-generated and a withdrawal address. The Trade tab is the order entry screen and a Tutorial tab that I haven’t explored with an FAQs tab with common questions.

There are two types of options available to trade: binary and european. The european options are called “vanilla” options on the site. The contract size is 0.01 BTC or 1% of a bitcoin in other words.  The contracts are based on an internal index that gives various weights to the major BTC platform prices. The index formulation is listed below:

Exchange Price Weight
Bitfinex 452.690000 0.029100
Bitstamp 452.800000 0.011472
Coinbase 455.440000 0.165079
OKCoin 453.170000 0.019601
BTCC CNY 454.953321 0.261188
Huobi CNY 454.973352 0.433884
itBit 453.590000 0.019020

The index is realtime and works just fine for me as I already use Coinbase and Bitfinex.

In terms of account level security, users are sent an e-mail each time an event occurs (logins, trades, etc).  I’ll post more about this site as I gain more experience with it.  I’m going to study various aspects of it including margin requirements, liquidity, etc in future posts. So far, the Coinut market architecture looks promising, although the liquidity looks thin.  I guess this provides both risks and rewards depending on what my strategy will be.