Quote from: thestringpuller on November 28, 2013, 05:57:04 PM

Isn't MPEX the only place you can reliable ~~under~~write [FTFY] and buy options against the USD value of BTC?

The quasi-options available are generally priced by a bot which maintains a usurious spread and ludicrous levels of implied volatility frequently far above historical volatility -- making them a perfect way to extract cash from those who don't ignore the place entirely because they don't realise there are cheaper ways of doing this stuff. As for reliability, the operator claims in his site's FAQ that he "doesn't hedge...options positions".

However, a reliable market maker -- one which does not introduce inordinate levels of counterparty risk -- does not enter into naked positions. (No pun intended, despite MP's history of involvement in the Romanian porn industry: I mean naked options positions). Not entering naked positions means, for example, taking a long position in the underlying whenever one becomes net short in calls on that underlying. This type of hedge is part and parcel of any competent market making activity in derivatives. Failing to do so means failing to deliver under a non-trivial set of possible market outcomes. (It also means profiteering by continuing to run that risk of failing to deliver and not spending the resources to reduce that risk.)

As far as I can tell, judging by the shellacking which the bot sometimes takes, the claim about failing to hedge is correct. This suggests that with respect to options market making, the operation is not reliable from the standpoint of counterparty risk. To someone not paying attention to the counterparty risk which is necessarily introduced by a failure to hedge, the operation may appear to be perfectly safe and reliable...right up until it isn't. This is little different than the appearance that a 20-sided die will never come up showing '1', because it hasn't yet done so during your first 10 rolls.

Oh, and just as a reference point, the combined revenue for MPOE options contracts sold during August, September, and October was something around 2180 BTC.

The current open interest on ICBIT just in the March 2014 BTC/USD futures contract is 387,424, while volume is showing at a little under $13 million. I have no idea what the site's revenue on that volume might be. But it's interesting that during just the last 7 days, the top trader on ICBIT generated a profit of around 755 BTC, and during the last 30 days, the corresponding figure was 1877 BTC. In other words, the profit generated by just one trader during the last 30 days is approaching the entire MPOE options revenue across all contracts for a 3-month period.

ICBIT carries significant counterparty risk too, but at least it comes clean about it, as distinct from disingenuously promoting a failure to hedge as a positive point, rather than as an indication of what it really is.

EDIT: Clarified my wording about revenues and volumes.