The dangers of selling Bitcoin options. Nassim Taleb and ‘Disaster’ Puts.
Disclaimer: This is not investment advice
On March 9th, the Bitcoin price was around $8000. Someone sold me half a put with a $6000 strike, expiring on 27th March for about $94 (see below). 4 days later I sold it in chunks for about $1200.
I had been buying these regularly and they often expire worthless. Something I had read from a Reddit AMA with Nassim Taleb stuck in my mind:
What he is saying is that OTM( out of the money) calls on average do better in the S&P market during big moves. But on rare occasions, OTM puts do extremely well in a panic.
That, and the regular warnings from Bambouclub reminded me to buy and let them expire worthless if needed.
If Bitcoin touches $7,500 before 13 March, owners of these 8250 Puts could make a 24x return. (Buy for $31 with Limit bid, sell for at least $750.) https://t.co/hVR1oAMw96
Interestingly, Naseem apparently attributes his biggest payday to luck. From a Quora.com discussion:
“Nassim was a profitable trader and doing quite well, but his big killing came the day of the October 19, 1987 stock market crash. He had accumulated a large position in near-worthless out-of-the-money Eurodollar futures puts. The Eurodollar future is a bet on the three-month bank interest rate and pays $25 per one basis point move (such as from 7.5% to 7.51%). A big day is a 10 basis point move, $250 per contract. But October 19, 1987, saw a move 10 times that size, $2,500 per contract as rates moved from about 7.5% to 8.5%.
The swings on an out-of-the-money put (which makes money when interest rates go up) are even larger. A short-term put at 8% might sell for $100 when rates were 7.5%, but would be worth maybe $1,500 when rates went up to 8.5%. Nassim was holding enough of these puts to make $35 million. This was his biggest win in the markets by far, and he attributed it to luck. It started him thinking that five years of constant work was worth less than one lucky break.” — Source
My takeaway is that you can’t predict when the biggest moves will come, so best to think of a small allocation to these puts as ‘insurance’. It was a shocking move, even for those who have been trading Bitcoin for many years.
But what if the price had jumped to $9,000 instead? I also bought an OTM call on the 9th to cover myself (see below).
It cost $100 and expired worthless. This ‘strangle’ is a way of being ‘long volatility’. I didn’t need to worry about the direction of the move. Only that it was big. My downside was $200, with unlimited potential upside. Now I sit on my hands, waiting for my setup to go ‘long vol’.
See Bambouclub’s introduction to options for further information on this. In the next post, I’ll discuss when to buy puts in a raging bull market of optimistic newcomers.
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The dangers of selling Bitcoin options. Naseem Taleb and ‘Disaster’ Puts. was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.