I've been thinking about the dangers of shorting long-dated options. These options cost more mostly due to their additional time value. Recall an option’s value = intrinsic value + time-value, therefore options with more time left will cost more.
Below are put prices for Oct-2020/11k vs. March-2021/11k. Despite both being OTM, March costs ~3x more than Oct. This is because the March option has 177 days vs. Oct only having 30 days left. March allows us to have optionality for 147 more days which is reflected in its price.
It can be tempting to short these longer-dated options given their higher premium. If all goes to plan and these options expire OTM, then there is a nice premium which can be collected (or as the saying goes these days - we can "harvest" these premiums).
One key thing about longer dated options is they are much more sensitive to changes in implied vol (larger vega) relative to shorter maturities. If #BTC IV were to jump higher for any reason, shorting these longer dated options could be disastrous.
On the flip-side, if you think IV will go up, then you can use a ratio like vega/theta to assess which option will give you the best “bang for buck”.
In that case, we want to maximize vega and minimize theta. Vega is how much our option value changes for a small change in IV. Theta is how much time decay we incur on a daily basis. What we want here is to pay less in theta to bet on higher volatility.
Vega/theta ratios get progressively higher as we move to longer maturities near ATM. If the goal is to bet on higher IV, these longer maturities may offer the best value. Conversely, these maturities also represent the greatest risk in shorting based on an IV perspective.
Note: the scale on the y-axis is normalized to make this plot easier to visualize. Also, for easier interpretation, here we used the absolute value of the vega/theta ratio as theta is negative when buying options.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
2. Not investment advice - just for fun / educational purposes.
3. Over the past few months there's been a steady rise in 0DTE options trading in SPX. These are super short-dated and there’s a lot of gamma associated with these options. Nearly 40% of SPX option volume was 0DTE in Q2 2022 - this has raised concerns from JPM researchers.
1. Over the past few day's we've noticed some massive trades on @DeribitExchange. Surprisingly some of these trades were executed against limit orders without using RFQs. This gave inspiration to build an order-book scanner which is now open-sourced: github.com/schepal/deribi…
2. The motivation for this whole project was due to some large whale deciding to trade 25k contracts of ETH-30JUN23-400-P on Jan 5/23. Digging into the details we can see this trader decided to sell these options against passive limit orders on Deribit.
3. It's interesting b/c this trader could have gotten much better execution by tapping an OTC desk or @tradeparadigm's RFQ platform. A possible reason is this trader wanted to be completely anon and not attract attention until after the trade was completed (h/t @VidiellaLaura)
1. A few weeks ago we witnessed a duel between @stablekwon and @AlgodTrading in a public wager on LUNA's future price action. In this piece written with @tradeparadigm we analyze how this bet could be priced using options pricing theory + who got rugged on this trade…
1. Over the past few months, DeFi ecosystems have witnessed a surge in structured product platforms - notably option vaults. While the current yields on these vaults can be enticing, we take a closer look at the long-run performance of these strategies: research.ledgerprime.com/p/a-quantitati…
2. Let’s start with a brief overview of the DeFi options space - TVL in 2020 was virtually non-existent but blew up to nearly $1B at the start of 2022. This was primarily due to the surge of activity within the DeFi structured products space. Data Source: @DefiLlama
3. Most of these structured products revolve around covered call options. As a refresher, this strategy involves being long the underlying spot asset and selling a call. This effectively caps the upside price action in exchange for an option premium.
1. One of the best decisions I’ve been lucky to make in 2021 was enrolling in the @TeamChainShot ETH dev bootcamp. Learned a ton of valuable skills which gave me a new appreciation for how all this stuff works. Some thoughts on my experience and advice to those starting out...
2. Why learn solidity in the first place? These were a few of my reasons:
- Be able to build sophisticated on-chain EVM strategies (aspirations of following the path of the sensei @mevintern)
- Become a better investor by understanding the technical nuances of projects
3. Cont...
- @LedgerPrime is going super deep into DeFi so getting familiar on how to interact/build with EVM chains helps us figure out how we can add more value to our VC investments
- And lastly, general curiosity + interest to learn a new skill. The most important reason!
1. Spent the past few weeks going down a rabbit hole learning about MEV and Flashbots — very cool stuff! I was surprised to learn that beneath the surface, Ethereum is lurking with sniper bots waiting for any opportunity to make money. Here’s a TLDR on some research + findings.
3. Whenever a tx is made on ETH, before it is fully mined it sits in a pending pool of txs called the mempool. The mempool is public - this is a problem b/c snipers are looking through these unconfirmed txs for opportunities to re-arrange the txs in the block for their benefit.