Option orders

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CALL Options using Escrow

Example

Let's say that on September 1st, 2012, Bitcoin exchanges for about $9.08 USD. Jen thinks the price will go up in the next several weeks and wants to secure the ability to acquire 10 BTC at a price near to today's price, just in case it does go up.

What she can do is announce her desire to buy a CALL option, a financial instrument that gives her the ability (but not the obligation) to buy at a certain price on or before a future date. To provide incentive to a potential seller, she offers a premium that the seller will keep regardless of whether the price goes up or down.

Jen offers to buy a CALL option for 10 BTC sold to her at $9.00 USD, at any time before September 28th, 2012. The premium she is willing to offer to the seller who accepts this deal is $0.95 USD per BTC, which totals $9.50 USD for the 10 BTC offer.

To maximize the chances of finding a seller, the same options cycle as is generally used elsewhere should be followed. MPeX options exchange is Bitcoin's largest and uses for its monthly options the last Friday of the month as the expiration date.

Her order is :

  • 10 BTC CALL,
  • Strike: $9.000 USD,
  • Expiration: September 28th, 2012 UTC (to execute, funds must be sent before midnight on Thursday, September 27th),
  • Premium: $0.95 USD (per BTC),
  • Settlement: MTGOXUSD redeemable code for both Strike and Premium,
  • Escrow required.

Bob holds 10 BTC and believes today's $9.08 USD level is about right, or perhaps a little high even and considers Jen's offer. If he is right in his assumption that Bitcoin will not rise in price, by accepting Jen's offer he stands to make 9.6% on the value of his 10 shares of Bitcoin while still retaining his stake.

The same issues described for Trading and Risk of Fraud apply with options as well. Please review Using bitcoin-otc first. A qualified and willing escrow partner may be found from the #bitcoin-escrow IRC channel.

Instructions

  • Buyer enters offer to buy a CALL option. See Order entry for general order entry instructions
;;buy 10 btc at 9.00 USD "CALL option premium $0.95 USD/BTC expires 28Sep12. escrow of BTCs required."
  • The order then appears in the the online order book.
  • After the agreement between buyer and seller is made:
  • Buyer and seller forward the contract details to escrow, escrow verifies terms and confirms the agreemtns.
  • The buyer sends to the escrow the non-refundable premium.
  • The seller sends to the agreed upon escrow the BTC in the amount of the total contract size plus enough to accommodate the escrow service fee.
  • The escrow partner notifies the buyer that the BTC has been secured and forwards to the seller the premium that was paid.
  • The buyer may exercise the option by sending to escrow USD for the amount of the contract size times the strike price.
  • If the buyer exercises, escrow sends the BTC to the buyer and sends USD to the seller. If the option expires without being exercised, escrow returns the BTCs to the seller.

Using the example from above

  • Jen enters her CALL option offer.
  • Bob accepts Jen's offer.
  • Jen then notifies the escrow and sends a $9.50 USD MTGUSD redeemable code.
  • Bob then sends to escrow 10 BTC plus a 0.25 BTC fee (estimate).
  • On September 15th, the exchange rate for Bitcoin reaches $10.00 USD, so Jen decides to exercise her CALL option to buy.
  • Jen then sends a $90.00 USD MTGUSD redeemable code to escrow and plus a Bitcoin address the bitcoins are to be sent to.
  • Escrow sends to Jen's Bitcoin address her 10 BTC and sends to Bob a $90.00 USD MTGUSD redeemable code.

PUT Options using Escrow

Let's say that on September 1st, 2012, Bitcoin exchanges for about $9.08 USD. Bob thinks the price will go down in the next several weeks and wants to secure the ability to sell his 10 BTC at a price near to today's price, just in case it does go down.

What he can do is announce his desire to buy a PUT option. A PUT is a financial instrument that gives hiim the ability (but not the obligation) to sell at a certain price at a future date. To provide incentive to a potential seller, he offers a premium that the seller will keep regardless of whether the price goes up or down.

Bob offers to buy a PUT option for 10 BTC sold at $9.00 USD, any time before September 28th, 2012 (UTC). The premium he is willing to offer to the seller who accepts this deal is $0.75 USD per BTC, which totals $7.50 USD for the 10 BTC offer.

To maximize the chances of finding a seller, the same options cycle as is generally used elsewhere should be followed. MPeX options exchange is Bitcoin's largest and uses for its monthly options the last Friday of the month as the expiration date.

His order is :

  • 10 BTC PUT,
  • Strike: $9.000 USD,
  • Expiration: September 28th, 2012 UTC (to execute, funds must be sent before midnight on Thursday, September 27th),
  • Premium: $0.75 USD (per BTC),
  • Settlement: MTGOXUSD redeemable code for both Strike and Premium,
  • Escrow required.

Jen holds 10 BTC and believes today's $9.08 USD level is about right, or perhaps a little low even and considers Bob's offer. If she is right in her assumption that Bitcoin will rise in price, by accepting Bob's offer she stands to make 8.2% on the value of her existing 10 shares of Bitcoin while still retaining her stake.

The same issues described for Trading and Risk of Fraud apply with options as well. Please review Using bitcoin-otc first. A qualified and willing escrow partner may be found from the #bitcoin-escrow IRC channel.

Instructions

  • Buyer enters offer to buy a PUT option. See Order entry for general order entry instructions
;;sell 10 btc at 9.00 USD "PUT option premium $0.75 USD/BTC expires 28Sep12. escrow of USDs required."
  • The order then appears in the the online order book.
  • After the agreement between buyer and seller is made:
  • Buyer and seller forward the contract details to escrow, escrow verifies terms and confirms the agreemtns.
  • The buyer sends to the escrow the non-refundable premium.
  • The seller sends to the agreed upon escrow the MTGUSD in the amount of the total contract size plus enough to accommodate the escrow service fee.
  • The escrow partner notifies the buyer that the USD has been secured and forwards to the seller the premium that was paid.
  • The buyer may exercise the option by sending to escrow BTCs for the amount of contract size times the strike price.
  • If the buyer exercises, escrow sends the USD to the buyer and the BTC to the seller. If the option expires without being exercised, escrow returns the USDs to the seller.

Using the example from above

  • Bob enters his PUT option offer.
  • Jen accepts Bob's offer.
  • Bob then notifies the escrow and sends a $7.50 USD MTGUSD redeemable code.
  • Jen then sends to escrow $90 USD MTGUSD redeemable code plus a 0.25 BTC escrow fee (estimate).
  • On September 15th, the exchange rate for Bitcoin reaches $8.20, so Bob decides to exercise his PUT option to sell 10 BTC.
  • Bob then sends 10 BTC to escrow.
  • Escrow sends to Bob a $90 USD MTGUSD redeemable code and delivers to Jen 10 BTC.
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