Yeah, I was shocked to discover that Hedgic options are American and can be X-ed at any point in time. They also assume that you are fully collateralized against the option you write which will create some really warped pricing incentives.
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Designing an automated market for crypto options as an exercise: Tips on Black-Scholes?
- Thread starter CyJackX
- Start date
Yeah, I was shocked to discover that Hedgic options are American and can be X-ed at any point in time. They also assume that you are fully collateralized against the option you write which will create some really warped pricing incentives.
An unfortunate side effect of the way the blockchain has to work; there's no way for the options to automatically exercise since they don't operate in continuous time. They are fully collateralized against the options they write; I just don't think the juice is worth the squeeze right now for them, they've spent nearly all the time with all their collateral locked up because IV spiked and they underpriced.
Also there's the issue of exiting the pool; how do you exit the pool when some of the collateral is locked??
I'm wondering if I could maybe apply something towards modeling the volatility surface using an IV Function, even going as far as to model smile and skew. How, though...
http://faculty.baruch.cuny.edu/jgatheral/barcelona2003.pdf
Btw, note that it’s difficult even to smooth out a vol surface with already mostly known option prices, trying to fill in missing prices, as the bids/asks can be al over the place.
There are tons of papers about this, each one offering different approach.
Here is a simpler process similar to one I’m using for smoothing it out:
https://www.imaginesoftware.com/2020/09/thinking-about-building-a-volatility-surface-think-again/
So coming up with vol surface out of thin air seems unusable for any practical purposes.
There are tons of papers about this, each one offering different approach.
Here is a simpler process similar to one I’m using for smoothing it out:
https://www.imaginesoftware.com/2020/09/thinking-about-building-a-volatility-surface-think-again/
So coming up with vol surface out of thin air seems unusable for any practical purposes.
again, it doesn't make any sense to put a theoretical model onto a marketplace. This would be just like equity options that can only be traded against a vol model set by the exchange.Yeah, that's what I'm seeing. Interpolating and smoothing the volatility surface accurately seems to be an open ended problem with many different attempts and solutions.
you need to figure out how you can create a market place that has supply/demand driven IV per strike and term.
Look at the vol surface of actual ETH and BTC options, they're all over the place. This ain't equity index option trading that is so efficient that they seem to be almost mechanical.
So in today’s news the guys who wrote the following paper have just been acquired by a crypto hedge fund for $35M.
https://www.notion.so/Impermanent-L...p-Whitepaper-158a9b90e3f349ff876f35334fe7f01b
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Abstract
In this paper, we describe a generalized, non-custodial, fungible protocol for the implementation of a total return swap that hedges liquidity providers' (LPs) exposure to impermanent loss (IL) in liquidity pools of decentralized exchanges (DEXs). By paying a fixed funding rate, LPs can hedge out any IL exposure and can be confident in receiving the original value of their investment, along with accrued trading fees, when they withdraw liquidity.
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https://www.notion.so/Impermanent-L...p-Whitepaper-158a9b90e3f349ff876f35334fe7f01b
=====
Abstract
In this paper, we describe a generalized, non-custodial, fungible protocol for the implementation of a total return swap that hedges liquidity providers' (LPs) exposure to impermanent loss (IL) in liquidity pools of decentralized exchanges (DEXs). By paying a fixed funding rate, LPs can hedge out any IL exposure and can be confident in receiving the original value of their investment, along with accrued trading fees, when they withdraw liquidity.
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again, it doesn't make any sense to put a theoretical model onto a marketplace.
I guess, then...who are these models for? Don't market makers use them?
I guess, then...who are these models for? Don't market makers use them?
They’re for people who buy a race car and need an instruction manual. Would you bet on them?
Though I think he implied that a model doesn’t exist because it’s determined by the market forces. You can use models to react and hedge yourself somewhat, but can’t force a model onto the market and decide how you want to set prices and implied vols.
Btw, even pro market makers like Timber Hill division of Interactive Brokers was gamed by other pro MMs, so they’ve lost so much money they had to sell it. While Robinhood lost millions on people finding option-based hacks and gaming them. And so many papers are written on options because no one has gotten it right, so they propose new theories all the time. Large MMs and Citadel use proprietary and practical (not theoretical) models that are guarded like the Coke recipe, and even then they aren’t models of the type you may have in mind.