Risk Free Challenge!

[JackRab]

Right @misterkel ... so you're trying to say that risk-wise it doesn't matter if a market is regulated or not?

What happens if you have a position in options on bitcoin... which are kept in an unregulated account, traded on an unregulated bitcoin exchange... or even bit-derivatives exchange... with (I assume) contract specs that are "set" by this unregulated exchange...what happens if that exchange decides to change the contract specs? What's going to happen if you lose money because of this? It's not regulated... I doubt courts will be very effective...

I might be wrong, and it's more regulated then I think... in that case mea culpa.

Crypto market is very inefficient and you can probably make some decent crypty money out of it.

In your ETH case... I don't now the exchange rules and specs.

You mentioned you need to hold long ETH somewhere else, different exchange? What does this mean for margin? What do they charge for this, because I would assume being synthetically short ETH is a high margin play... if possible at all. In which case the 11% premium in a future isn't that strange, since it's a leveraged product that might be hard to short? Lot's of ETF's trade at premiums exactly for this reason...

How is the expiry settlement done? Also, being inefficient... what's the possibility of you being squeezed out in this short ETH future? If you're short and ETH gets pushed up in a spike and you have a forced buy-back in the future at a rich level... you might not be able to get out of your long ETH.

Because of a highly inefficient market, manipulation is very much possible and therefore a big risk. You mentioned the LIBOR-fixing scandal... if they can do that... don't you think that ETH can bee manipulated on a price level?

PS. You never responded - https://www.elitetrader.com/et/threads/futures-underlying-arb.312867/#post-4511054

EDIT. I had a quick look at specs.

I assume ETH futures is treated similar to Bitcoin futures. Futures expire base on a 30M TWAP of BXBT... which is 'the bitcoin price'. But as they state on their website:

".BXBT pricing is currently derived from equal parts Bitstamp and GDAX. This composition is subject to change due to unprecedented exchange instability."

apparently they can change the composition...

 

[JackRab]

Shit - forgot LIBOR, the trillion $ scandal where the big, VERY REGULATED banks rammed it up the arse of thousands of small municipalities based on the rubric of interest swaps 'to eliminate risk.' Many went bankrupt. Ah, but it's okay - that was 'regulated.' Makes everything just fine.

I've got a different opinion on that. You say rammed up the arse... maybe they sold it hard... but anyone in a finance department who is going to engage in financing activities should know what they are doing and should know the working of swaps etc.

I don't put the blame on banks, except that they could've made sure the counterparty was better aware of the workings...

I put the blame on the idiots that run a finance department of a local government, which in it's own rights is very inefficient and bureaucratic... and let's not forget very susceptible for fraudulent behavior (they are government pencil pushing lazy f#$ckers ).

We've got a saying here in Australia... buyer beware...

 

[sle]

Shit - forgot LIBOR, the trillion $ scandal where the big, VERY REGULATED banks rammed it up the arse of thousands of small municipalities based on the rubric of interest swaps 'to eliminate risk.' Many went bankrupt. Ah, but it's okay - that was 'regulated.' Makes everything just fine.

Not gonna comment on your rant, since it's counterproductive. However, I doubt these municipalities went bankrupt because of the LIBOR manipulation (the manipulation caused deviations of at most a few basis points from the expected value).

You can't deny that an "arbitrageur" in crypto currencies is taking on a fair bit of settlement, security and fungibility risk. In case of a futures contract, this adds a event risk - your bitcoin that you are long might change in nature while your are waiting to deliver it (e.g. what if it forks during the period?).

 

[JackRab]

Not gonna comment on your rant, since it's counterproductive. However, I doubt these municipalities went bankrupt because of the LIBOR manipulation (the manipulation caused deviations of at most a few basis points from the expected value).

I think he meant the whole interest rate swaps saga that's still ongoing... where clients locked in 'low' rates, but now they are complaining because the rates went even lower...

...what if it forks during the period?...

I forgot to mention that one ... 'corporate actions'... yeah, how are those treated... is there any ruling based on that?

 

[JackRab]

https://www.bitmex.com/app/fairPriceMarking#calculation-of-fair-price-for-perpetual-contracts

This reads like it's a manipulators dream...

The fair price of a crypto future is calculated using "impact pricing", probably to work out where they can hedge the futures trade themselves... so theoretically you could influence the underlyin BTC orderbook in a way that affects their future price calculation... hit the future and delete the BTC orders... if you're fast enough...

Technically, that would be 'spoofing' and because it's an unregulated market.... it's totally allowed!!!!

 

[sle]

I think he meant the whole interest rate swaps saga that's still ongoing... where clients locked in 'low' rates, but now they are complaining because the rates went even lower...

Actually, I think many of these muni issuers have swapped fixed for float and have done OK recieving float in the last years. Of course, those do not complain, it's the ones that decided to hedge their future issuance that are unhappy.

 

[JackRab]

Actually, I think many of these muni issuers have swapped fixed for float and have done OK recieving float in the last years. Of course, those do not complain, it's the ones that decided to hedge their future issuance that are unhappy.

This whole thing is like me buying a new car... driving it for 3 years and put 100kms on it... then there's a more fuel efficient one and demand a full refund because mine is a gasguzzler and they didn't give me a fixed fuel price...

 

[newwurldmn]

Tax loopholes can definitely be low on risk... but I wouldn't call them risk free.

In Germany there was a massive dividend tax loophole that was taken advantage off, if you knew how to... but some firms ran into trouble costing millions. Because it's usually very close to yes/no/crossing lines, you might end up at the wrong side.

But if you've done your homework, then yes... can be very profitable. Usually not for retail though

In Belgium, there used to be a system where profit and losses on options were non-taxable but on stocks were. So there was a strategy where at expiry you could do an ITM hedged short options trade... Options are assigned, the gain in premium is un-taxed... and the loss in being called on stocks at a lower price than bought in the hedge is tax-deductible. I think that doesn't happen anymore... It think it's a bit tricky as well in accounting matters...

@Sig, didn't know about the Uni-bonds... but it's not like we as retail can use that as a strategy though.

When we did similar trades we got the blessing of the local tax authorities and our lawyers. Every year we would have to wait until the local governments' budgets would come out. It was risk free. Not a retail strategy.

Speaking of corporate actions (one of your later posts), there was an arbitrage about 15 years ago that only worked for retail. I don't remember the details but it involved a merger of a pipeline company and how oddlots were treated.

I agree with your point on this thread. There really is no arbitrage for retail investors.

 

[newwurldmn]

Actually, I think many of these muni issuers have swapped fixed for float and have done OK recieving float in the last years. Of course, those do not complain, it's the ones that decided to hedge their future issuance that are unhappy.

Muinicipality and corpation hedging is really shorting puts for the actual people who actually do it.