Observations on Token Derivatives – Part Two

3 min read

In Part 2, we continue discussing how to use the MOVE Contract by understanding how does the buyer operate. Further, we discuss the practical results of the strategy and before we conclude, we discuss some problems with MOVE and thoughts on potential improvements.

Read Part 1 here.

2. How to Use the MOVE Contract? [Continuation]

2.4 How does the Buyer Operate?

  1. A) Source of Profit

The buyer’s profit mainly comes from the increase of the volatility’s absolute value. Therefore, the premise is to have a low time value. When the delivery price is expected to be the same as the actual price, delta is close to 1, and the price fluctuation of MOVE contract is basically the same as that of BTC.

However, considering the margin, longing MOVE cannot have the same high odds as that of the “Doomsday” option, and it’s not suitable for users with higher risk preference.

  1. B) When to Be a Buyer?

In any case, it is safer to be the buyer when X is smaller.

  1. C) It is a Good Substitute for Futures When Chasing the Highs and Stopping before the Lows

When BTC fluctuates greatly, MOVE price basically keeps pace with BTC. However, when the futures are chasing highs and the price plummets, it will incur great losses. While if we long MOVE, we can reduce the loss or even make money if the price falls to a certain extent.

For instance, the figure below is a comparison of BTC price on 11 October, MOVE 1011 price, and BTC price minus benchmark price on that day (i.e. expected delivery price).

BTC rose to a peak above 8800, then plummeted to below 8300.

At the same time, when one has overtaken Bitcoin futures and MOVE1011 contracts at the position of Bitcoin 8800; on the futures end, he ended up losing about $500.

While on the MOVE contract, the price corresponding to RMB 8800 is 194. Although the price of Bitcoin dropped from 194 to 134, the benchmark price of MOVE1011 is 8556. Therefore, when the BTC price dropped below 8450, the expected delivery price of the MOVE contract has reached 100. Further coupled with time value, support has been gained.

As the price of BTC continues to fall and the absolute volatility value further expands, the MOVE contract purchased at the highest point of BTC8800 can be delivered at 247 Yuan, making a profit of 54 US dollars by the end of the day.

Compared with the loss of $500 in chasing high futures, it can be seen that in extreme market conditions, the MOVE contract is a better alternative.

  1. Practical Results of the Strategy

A simple time value strategy for sellers

Strategy: sell at opening price and close the position when time value is less than 50

It is assumed that the administrative fee for each transaction is 0.09%, with one price taker and maker, and the hedging cost is not considered.

Period: from 28 September to 13 October.

3.1 Back Test Results

Assuming an investment of 10,000 USD, while considering the efficiency of fund use without using margin, the accumulated net profit of 16 trading days is 183 USD, and the annualized yield is 41.2%.

Risk tips: this is based only on historical data, it does not mean that it can be maintained in the future. The sample size is also too small to fully reveal the risk of the seller. Further, the capital capacity and other factors are not considered.

  1. Some Problems with MOVE and Thoughts on Potential Improvements

4.1 The buyer’s pay-off odds are insufficient

Perhaps it’s because of the product or risk control considerations, therefore unlike the purchasers of traditional options, MOVE contracts do not have the characteristics of high odds.

4.2 It is difficult to match the requirements of the buyer and the seller

Since there is no high odds, it cannot attract users with strong “risk appetite”. It’s hard to attract buying during trading periods with high time value at the beginning of each day. In the low time value stage, the buyer and seller’s return curves are more similar to futures, and more advantageous for the buyer. Therefore, this period of time is less attractive for the seller.

It is very difficult to match the needs of both parties of the MOVE contract. In fact, the transaction volume is not large as well.

From these two points of view, FTX’s MOVE contract needs to further improve on its mechanism, so as to introduce users with higher risk appetite to serve as the matching adhesive between the buyer and the seller. How to match the different transaction needs of the buyer and the seller concurrently is also an important part to be considered in the future design of Derivatives Innovation.

  1. Conclusion

I believe that in the future, the innovation of token derivatives will emerge in an endless stream, and the way of making profits will become more and more complex. The traditional way of betting on one side will make it more and more difficult for speculators to sit together with professional investment institutions.

Therefore, when token derivatives are in the ascendant and there is still much room for trial and error, it is necessary to conduct research promptly.

Disclaimer: Futures, Forward Exchange Rate Agreements, Options and Contracts for Difference (OTC transactions) are leveraged products with high risks, which may lead to the loss of your principal investment. Thus, it may not be suitable for everyone. Please confirm that you fully understand the risks involved in the transaction of these products and do not invest funds beyond your loss tolerance.

Alan Zhang Alan Zhang is an investor and market gazer that leverages greatly on data technology in decision-making. He is familiar with the different financial markets of China including the stock, futures and cryptocurrency market. Further, he participated in the establishment of alternative investment markets like black tea since 2014 and was responsible for the private placement of Huangshan Tourism shares (600054.sh) in 2015. He is currently also a Financial Analyst at X-Order, an innovative research institute that attempts to combine cross-disciplinary fields such as distributed computing, computational game theory, artificial intelligence and cryptography to discover future extended orders. It was founded by Tony Tao, who is also a partner at NGC Ventures.

One Reply to “Observations on Token Derivatives – Part Two”

  1. Great article Alan! In your simple backtest strategy, you mention to sell at opening price and close the position when time value is less than 50. Do you set a stop loss for this strategy too? For instance, the backtest results for 30 Sept, 6 Oct and 7 Oct, 11 Oct and 12 Oct were losses – for these days, how did you make the decision to exit?

    For example, if you sell at 200 opening price, but price of BTC moves a lot in Beijing AM, such that price of MOVE hits 500 but time value is still over 50, will sustain big losses. Would you place a stop loss e.g. at 250 or something?

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