Everlasting Options

https://www.paradigm.xyz/papers/everlasting_options.pdf
https://www.paradigm.xyz/2021/05/everlasting-options/

Transcript

1. Everlasting Options 10/11輪読 B3 mikan mikan@sfc.wide.ac.jp
2. 📈Call Option and 📉Put Option - (European) Call/Put Option is the financial derivatives that the right to buy/sell the underlying asset on a specific Maturity date at the strike price. e.g. ) Call Option, underlying asset: ETH , Maturity date: Nov 1, Strike: $3500 If the ETH price is $4,000 on Nov 1: exercising to buy ETH at $3,500 and sell it at Spot for $4,000, means option hodler get a $500 payoff. If the ETH price is $3,000 on Nov 1: There is no reason to exercise the Option because it is cheaper to buy it in the spot than to exercise it. $0 payoff. Call Option Payoff = max (spot - strike, 0) 2
3. 3 https://ftx.com/options
4. 🏷Option Pricing - An option is generally worth more than its payoff up until the moment it expires because the probability of that the payoff will occur before maturity (the probability of In The Money) is more than zero. - The price of an option can be determined by the formula called the Black Scholes. 4 https://www.paradigm.xyz/papers/everlasting_options.pdf fig. 1
5. 🏷Option Pricing 5
6. 🛒Rolling and its Problem - Since the Option has a maturity, you need to buy a new maturity when you extend it. (Need to pay a higher spread to Market Maker) - There is also the Perpetual american option that can be exercised at any time, but the risk to Market Maker is actually too risky to sell, and very difficult to price. 6 https://voptions.binance.com/en
7. 📝 Perpetual Swap (Perps) - The issue of liquidity fragmentation due to the diversity of maturities is also happen on futures. - Perp Swap is a product introduced by Bitmex, a major derivatives exchange, and as the name suggests, it has no maturity. Then follow the rules below. - There is a target Spot Market Price(Index Price). - If the perps are trading at a price higher than the Spot Market Price, the Long side pay the interest to the Short side. If it were the other way around, the Short side pay to the Long. - The Interest Rate is determined by the deviation from the Spot Price. e.g.,) (Perps - Spot)/24h 7
8. 📝 Perpetual Swap F.A.Q. Q: How to arbitrage? A: If BTC/USD Perps Price> Spot Price (Long pays short): Borrow USD, Swap to BTC, then Short the same amount at Perps. Q: What the difference between Perps and Margin? A: Perps isn’t physical settlement. net settlement. 8
9. 💡Everlasting Option - Everlasting Option : Perpetual Swap flaovered Option. - Funding Rate circulate from “Perpetual Mark Price - payoff”. - e.g.) Long ETH Put, $3000 strike - if ETH Price $2900, payoff is 3000-2900=$100. if Perpetual Price is $150 before funding is paid, then the longs would have to pay the shorts $150 – $100 = $50 per day. - if ETH Price $3100, Payoff is zero. if Perpetual Price is $50 before funding is paid, then the longs would have to pay the shorts 50 – 0= 50 per day. 9
10. 💡Everlasting Option Pricing: It varies greatly depending on the timing of the Funding Rate, but in any case, it seems that the same position can be synthesized by holding multiple options with multiple maturities. e.g.) Funding Paid twice daily: almost exactly same with the same strike expiring in one day Funding Paid daily: basket of ½ option of today, ¼ option of tomorrow, and so on. 10 https://www.paradigm.xyz/papers/everlasting_options.pdf , page 9-10
11. 11 https://www.paradigm.xyz/papers/everlasting_options.pdf , page 5
12. 🧪Test assumption: Funding Paid twice daily. Follows Black Scholes formula. Prices have not changed at all since day one. Risk-Free rate, dividend = 0. ETH =$3000 Volutility = 100% 12 1 Day Everlasting Option Funding Rate 30 times of 1-days. 30 day option price - payoff Strike $3500 $0.08 $2.4 $182.71 Strike $3000 $88.57 $2657.1 $353.08 Strike $2500 $0.46 $13.8 $136.63 It would be expensive carry cost to Long ATM Everlasting Option. https://zerodha.com/tools/black-scholes/
13. Reference - https://www.paradigm.xyz/2021/05/everlasting-options/ - https://www.bitmex.com/app/perpetualContractsGuide - https://research.paradigm.xyz/cartoon-guide-to-perps - https://www.paradigm.xyz/papers/everlasting_options.pdf 13