Aug 14, 2018

Good-bye MANA Partners

MANA Partners, a much-hyped trading firm founded by Manoj Narang (ex-Tradeworx) is in a total tailspin after launching trading in January 2017.

According to a confidential source, the firm had as much as 400M AUM, however its trading record was anything but dismal, losing money almost every month since inception. Most investors withdrew money immediately after 1-year lockup period, and now the firm has less than tenth of AUM they started with. The staff count has been decimated as well.

In addition I was told that the firm has spent prodigally on top quality feeds, colo, hardware, and other infrastructure, but that IP belongs not to the hedge fund, but rather to the technology affiliate MANA Tech llc.

As recently as April, Institutional Investor profiled Mr Narang in most glowing terms, ranking him #1 in their Trading Technology 40 list.

Aug 8, 2018

What's The Opposite Of "To The Moon" ?

As BTCUSD rate is falling ( down to the Earth? ) prudent traders know that there are many ways to play the market. Of course people who were short futures, or long puts are able to realize gains, but I would like to suggest other ways to play the market as well.

1 - There is a limited downside to the market, and steep call skew. If you think that market will recover, you can purchase at calls, financing them with 2 otm calls. For example, end of August 6500 / 7500 spread, for a small debit.

2 - If you think the market is going lower, consider buying near put, financed by otm call. 5000 / 8000 end of August spread looks reasonable, and at this futures level quite closer to the down strike.

My preferred way to spread the market is by not by vertical spreads, but rather with calendar and diagonal spreads. I will be discussing these strategies in the future, but in the meantime wanted to share some news: it seems like after recent Bitmex outage, Deribit has been gaining new futures traders. While I typically don't write about this - besides options, Deribit is a solid and stable futures platform.

Jul 25, 2018

Bitcoin Volatility, Skew, and Options Pricing, Part 3

Recently Deribit, the leading cryptocurrency options exchange introduced a new service - crypto-based USD loans. Here is a blog post that describes existing marketplace for crypto-based loans, and the loan service that they are offering. The service is radically different from existing services, as it relies on hedging.

As described in that blog post I linked above, existing services rely on getting a collateral much higher than the value of the loan, to compensate for the high risk of volatility of crypto. For example, lender may require a 50% loan to value ratio, lending 0.50 per 1.00 of crypto collateral. This is obviously not very efficient use of capital, and still does not protect the lender if value of collateral falls below 50%.

Deribit will be using a combination of over-collateralized lending as above and hedging to provide better rates. For example they may offer 75% loan to value ratio, lending 0.75 for 1.00 of crypto collateral, but hedge their remaining risk by purchasing puts. If the value of collateral declines, the combination of reserve and long put option will protect them from loss.

Why is this important? The answer, in one word would be - SKEW. Crypto lending is a growing market with demand exceeding the supply. If Deribit's lending service will take off, it will create a strong, systematic buying pressure on puts, raising the left skew. I wrote before that markets treat BTC as a speculative asset, with call skew. In a year from now we may see a more symmetric skew behavior in BTC.

Such change may provide an opportunity for an interesting trade - to substitute BTC deltas with a long near ATM call and short OTM put, to capitalize on skew differential.

Jul 10, 2018

Bitcoin Volatility, Skew, and Options Pricing, Part 2

The market for BTCUSD options is not a recent phenomenon. There were several "startup" exchanges offering options since shortly after Bitcoin itself rose in popularity. Most them failed in contract design, particularly in their design of handling margining of short option positions, or failing to design decent interface to attract traders, or getting active market makers to provide liquidity. To digress, in my experience most of the cryptocurrency exchanges appear to be designed and operated by web-developers, with no knowledge of how modern financial exchanges work.

Anyway, there is one leading exchange for trading cryptocurrency options - Deribit , and several runner-ups. LedgerX is CFTC registered exchange based in the USA, unfortunately liquidity is at this time is quite low. Their contracts are large, aimed at institutional traders, and trading is somewhat sporadic. Bitmex, a leading futures exchange recently introduced a very poorly designed options contract; liquidity is non-existent. Quedex is another options-focused platform, but I cannot find any volume figures or statistics.

As I mentioned above, only Deribit offers robust liquidity at this time; in the next blog post I will explore bitcoin options pricing and trading strategies.