1/ The term EV gets used a lot on CT, and yet I meet people who have no clue what it means constantly. ⚡️

So I am going to take a moment out of my day to explain to you Expected Value. 🧵
2/ Expected value (EV) is the sum of the probability weighted outcomes. Here is an example, let’s say you have five pieces of paper in a velvet bag, all of them numbered 1-5. If you pull any one number, you will have a 20% chance of choosing any of them. (1/5=.2)
3/ Lets do some quick math. We have a 20 percent chance of pulling a 1, 2, 3, 4, or 5. So,

1*.2 = .2
2*.2 = .4
3*.2 = .6
4*.2 = .8
5*.2 = 1

Now, if we Sum the outcomes we get 3.
4/ In college we played a game. We charged $3.25 to play. If you pulled a 5 out of the bag we paid you $5. If you pulled a 1 we paid you $1, meaning you lost $2.25 etc.

Question, would you take that bet?
5/ Since we did the math we knew the EV was 3, but we were charging $3.25 for each pull, so in the long run we averaged +.25 profit a pull.

( .25 cents bought you 1/2 a ramen packet back then btw)
6/ Now lets apply this to Options.

Let’s say we want to buy a 45k call that expires tmrw.

Let’s also say the $BTC has a 20% chance of being worth 40k, 42k, 45k, 48k, 50k.
7/ At expiration the 40k, 42k, and 45k will be worth $0. But the 48k will be worth $3k, and the 50k strike will be worth $5k.
8/ Lets do the math.

0*.2 = 0
0*.2 = 0
0*.2 = 0
3,000*.2= 600
5,000*.2 = 1000

Sum = 1,600
9/ If the probability weighted outcome of buying the 45k Call Option is $1,600. How much are you willing to pay for it?
10/ Hopefully that helped to shed some light on EV and maybe the way you think about buying options.

If you have any questions, fire away. ⚡️

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More from @PowerTradeHQ

6 Jan
1/ Here is a great thread outlining what's going on mechanically in the crypto Option markets regarding Decentralized Option Vaults (DOV's) and IV.

Read it for yourself and I will break part of it down below in "ELI5" style.

2/ To understand this thread you need to have a slight understanding of gamma and how MM (Market Makers) operate. The mechanics are explained well here. 👇

3/ Now for the ELI5 version.

⚡️You deposit your collateral in a DOV
⚡️DOV sells Calls on your behalf.
⚡️MM's buy those calls from DOV.
⚡️DOV collects premium and participants pray the underlying doesn't blow past the strike.

With me so far?

Read 12 tweets
8 Dec 21
1/ I've seen many of you asking what the heck this is and how to interpret it. So over the course of this brief thread I will explain the basics.⚡️

This is TLDR on Term Structure. 🧵
2/ Term structure simply displays the ATM (at the money) IV (Implied Volatility) of different expirations. In the above example it looks like 17DEC ATM IV is around 78-ish, and 28Jan22 is over 85 IV.
3/ There are two main types of term structure. Backwardation and Contango.

Backwardation is when the near term expirations have a higher IV than the further out expirations. In our case, maybe 15DEC has a 100IV and 28Jan22 has a 70IV, that would be backwardation.
Read 8 tweets
27 Oct 21
1/ We are in the season of UpOnly and you most likely don’t want to give up exposure to #BTC’s upside, but what if you want to use your capital efficiently and earn a kicker on your coin. ⚡️

Enter the Short Put Spread.🧵
2/ It’s a simple concept. Sell one put a little OTM, buy one put even further OTM.

I'll break it down for you. Let’s build a Put Spread step by step.
3/ First, sell an OTM put, whatever Delta you choose is up to you and your strategy. For this example, lets say #BTC is trading at 63k, I’m going to sell the 60k put. The payoff would look like the chart below👇. If #BTC expires at or above 60k we make money.
Read 12 tweets
28 Sep 21
1/ Today we saw a good amount of #BTC puts sold. So I wanted to explain how that works and why one might do that.⚡️

This is a short thread on selling puts! 🧵
2/ When you buy a put you are essentially buying insurance incase #BTC’s price starts to tank. This cost a premium, but when you sell a put you collect that premium. We discussed this in our previous thread on buying and selling calls.

3/ So lets say I sold a put at the 39k strike, what would happen? Well first I would collect the premium from the buyer of that strike, for examples sake, lets say the premium was $100.
Read 11 tweets
8 Sep 21
1/ PowerTrade #GreekWeek Day 2 - GAMMA

I’m sure you have heard it mentioned all over twitter, and it might seem a bit confusing, but in this #PowerKnowledge thread we are going to demystify Gamma and explain it in simplest of terms.

Gamma NFT Drop at the end... Image
2/ Gamma is the rate of change in Delta. If you don't remember Delta, here is our thread from yesterday explaining it.

TLDR: Delta measures change in the option price for every one dollar move, and gamma measures the change in Delta.

3/ So Gamma is actually what's called a second order derivative, because it doesn't measure the change in the Options value, it measure the change in the thing that measure the change of the options value ie. Delta. Image
Read 14 tweets
2 Sep 21
1/ Today in our #Powerknowledge series we are going to talk about what happens when you buy or sell Call?

Over the course of this series we will talk about Greeks, Volatility, Leverage, and Spreads, but first we must build a foundation.

A thread. 🧵👇
2/ So what is a Call? I'm sure you have heard it 100 times, a call is the right (but not the obligation) to buy $BTC at a certain price, within a certain time period.
3/ That's the book definition, but I find it helps to look at a real world example. Say you buy one 50k #BTC Call that expires in 60 days. If at expiry #BTC its trading at 52k, you have the right to buy 1 #BTC for 50k. Does that make sense? You just bought #BTC at at 2k discount.
Read 18 tweets

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