Understanding Move contracts –Trading volatility for dummies
The options market is large and complex.
Once you look past the classic wallstreetbets degen bets on earnings, you will realize how complex options can be.
What makes options unique compared to futures or other derivatives is the fact that you can not only express your opinion of the direction of the given underlying asset but make money when you don’t know what the market is about to do but think it will move a lot or not move much at all.
This is called volatility trading.
This article will break down the basics of trading volatility and mainly focus on Move contracts, which are cryptocurrency-specific derivatives for simplified trading of volatility.
I have covered the basics of trading options in articles about derivatives; therefore, I won’t be talking about the basics of puts and calls here.
But for a proper understanding of Move contracts, you should have at least the most basic understanding of how volatility trading works.
It is worth mentioning that it is worth it to look into trading options, although this topic can be scary at first.
You can use options for hedging making asymmetric bets on directional moves, but also learn valuable insight based on the options flow and what other traders are doing.
Because I focus primarily on trading futures, I still learn myself and tend to look at additional resources when it comes to options.
I will list the valuable books and other blogs that cover options more in-depth throughout this article.
So, what is volatility?
In simple terms, volatility measures how much markets move.
If you look at this Tradingview chart, we can add an indicator that plots Historical volatility on the chart.
This historical volatility is simply a lagging indicator showing how much the market moves in the past.
In options space, you have something called Implied Volatility calculated using the Black Scholes Model.
The implied volatility tells us how much movement is expected for a given option until the expiration.
So, for example, if you are buying an option with 30 days to expiration that has a strike price of $100 and IV of 20%.
It suggests that you can expect a 20% movement in price in either direction.
Implied volatility is also a direct correlation of the price of the options.
Let’s say you have two options; one has an IV of 20% and the second one IV of 80%.
Which one is going to be more expensive?
The one with IV of 80% because there is more significant expected move until the expiration, therefore more room to make a profit.
Imagine this, you are looking at the options chain one day, and you see an option with an IV of 20% for a stock that has some news coming in upcoming days, and there is an overall lot of buzz around it.
Because of that, you feel like this option that expires 30 days from now can move more than 20% in that period.
So what you are going to do?
If the underlying stock is trading at $100 now, and you buy an ATM Call option because you expect the volatility to come on a larger scale, you still have directional exposure to the upside as you bought a call.
What you need to do next is simply a buy put at the same strike price with the same days to expiration; this is called buying a straddle.
This is what straddle looks like.
You are betting that in the next 30 days, the market will move outside of the strike price, no matter what direction is that going to be.
Without going into options greeks and making it much more complicated than it has to be, you are now in a Delta neutral position (no directional exposure to underlying asset). Your concern is time to expiration, which is in options trading referred to as Theta (time).
Because you are buying options, you pay a premium which is your biggest risk in the trade.
In this case, time is against you because if the market is not going to move in that 30 days and stock will stay at the strike price, you will not make any money, and your option will expire worthless.
Bear in mind that the option not only has to move from the strike price, but it also has to move past your break-even (what you paid in premium on each leg) for you to make money.
For the infographic above, you bought a straddle with a strike price of $250, and as you can see on the image, you start to make money if the stock moves past $219.70 or 280.30.
On the other hand, your upside gain is unlimited; it doesn’t matter which way the stock is about to move; it just has to move a lot from your strike price.
To recap a long straddle, you express your opinion that the volatility is cheap and the price can move beyond the implied volatility.
Now let’s assume that you see implied volatility of 70% and think it is overshot.
There might already be some move, or the market is just, in your opinion, coming into a lower volatility period.
To express this opinion in the market, you sell volatility.
As you can see, we once again have a straddle, but now it is pointing to the opposite side.
If you are buying options, your max risk is always the premium you paid for the option, and your upside potential is technically unlimited.
If you are selling options, it is the opposite.
Your max gain is the premium received, and max loss is technically unlimited.
This might sound like crappy R: R and bad trading practice to take a trade with unlimited loss potential.
To make this trade more appealing and less exposed to risk, you can buy two more legs to it, which will make it an Iron butterfly.
So you are not only selling one ATM Call and ATM Put with the same expiration date and strike price, but you are also buying OTM call and put to offset your risk.
After that, your trade will look like this.
There are many variations of this; the options market gives you plenty of room to set up your trades in different ways that you will be able to capture profits with well-defined risks.
Of course, making a valuation of volatility to decide if volatility is cheap and we want to buy straddle or if volatility is expensive and we want to sell straddle is the tricky part which is done by using different models in the options market that is way beyond the scope of this article.
One of the more straightforward ways of evaluating volatility and predicting future movements would be looking at the VIX index.
The Vix index represents expected volatility for the upcoming 30-day in the U.S. stock market.
This measurement can be then translated into the S&P500 and its derivatives to measure expected volatility.
In cryptocurrencies, we have BVOL, the Bitcoin Volatility Index created by Bitmex, which is very similar to the VIX.
There is also Deribit Implied Volatility Index (DVOL) which I did not fully explore, but you can read more about it here.
When it comes to volatility, two main characteristics tend to repeat.
Volatility is mean-reverting and clustering.
In the most simplified way, volatility looks something like this.
Volatility tends to always revert to the mean, but once any expansive move happens, volatility slows down and cluster for a certain period before the mean reversion occurs.
You can see this behaviour on the BVOL index using a simple oscillator; in this case, RSI, every time market extended to “overbought” territory, volatility tends to cluster for a bit before the reversion to the mean.
This observation might have given some of you the idea that it will be an excellent trade to short volatility every time RSI cross the overbought level.
Unfortunately, in the real world, things are not simple as that; the chart below highlights in red the day/candle RSI reached the extreme.
As you can see, shorting volatility blindly in all of these cases would cause you a lot of harm, especially since your potential loss is unlimited when you are shorting options.
Nonetheless, volatility trading is a unique and interesting thing to do.
Instead of betting on the underlying asset’s direction, which is often reasoned by technical or fundamental analysis, volatility trading is purely based on statistical analysis and observing the market sentiment.
You can trade volatility in stocks and crypto, forex, or futures as they all have liquid options markets.
Move contracts are simplified derivatives that FTX introduced.
They give you the ability to trade volatility without looking at the options chain, bothering about greeks and other complicated stuff.
Move contracts represent the absolute value of the amount underlying moves in a period of time.
In this case, the underlying is Bitcoin.
Each Move contract expires to the absolute value the underlying (BTC) moved on a given timeframe.
Same as buying or selling straddles, each Move contract has its own strike price.
This strike price is calculated as TWAP of 30minute before the close of the previous contract and TWAP of 30min after the open.
So, for example, if the strike price is at $41,000 and Bitcoin at expiration is trading at $43,000, the Move contract gained $2000 of value.
If at expiration Bitcoin is trading at $39,000, Move contract also gained $2000 value.
As you can see, this is the same as trading the straddles as you are not based on the direction of the Bitcoin, but all you need to realize a profit is to see volatility happening in the market.
One of the common misconceptions of people who are new to trading volatility is that they think that any swings in price are considered good and will make money anytime underlying moves.
This is not true, as the strike price plays a crucial role in your PnL.
Move contract types
Currently, FTX is offering three Move contract types Daily, Weekly and Quarterly expirations.
The ticker for each contract on FTX is BTC-MOVE-(EXPIRATION).
For example, BTC-MOVE-0322 is a daily Move contract that expires at the daily close of the 22nd of March 2022.
Weekly move contracts expire to the absolute value that BTC moved from open to close in a single week.
The way these contracts are currently offered on FTX, weekly move contracts do not expire on Sunday but Friday’s daily close.
The quarterly move contracts expire to the absolute value BTC moved from open to close in roughly three months.
Move contract specifications
Move contracts are futures derivatives offered by FTX, and they follow common rules other FTX products have.
Liquidations for move contracts is the same as other derivatives on FTX.
Your positions start to get liquidated if your collateral drops below the maintenance margin.
When it comes to Profits, the % gain is irrelevant.
If the move contract moves from $100 to $500, your PnL will be the same as moving from $1000 to $1400, although your % gain will look different.
The only thing that matters is the point value of the move contract, not the % gain.
The common misconception comes from Margin requirements.
Required margins to open 1BTC are based on an underlying asset, not move contract itself.
If the Move contract trades at $1000 and BTC is at $40,000, we need $40,000 to open a 1BTC position in the Move contract, not $1,000.
This graphic was taken from an infographic made by Gian, and you can find it here.
It is taken from FTX Move Contract musings, which is a great resource for Move contracts and other things.
Another excellent resource for understanding Moves contracts is on Medium made by Romano.
The fee structure is the same as other products offered by FTX.
More of the contract specifics can be found in the official FTX documentation.
Understanding extrinsic value
When it comes to trading options, or in this case, Move contracts, we have to factor in the price, which presents the intrinsic value of the contract and the extrinsic value, which we refer to as Theta (time).
Compared to futures, options are decaying products; when you buy a futures contract, you can technically hold it forever (although futures contracts expire, you can roll them over to the next period; therefore,e it doesn’t change much).
But options have a fixed expiration date.
You buy a call option in Bitcoin with a strike price of $40,000 that expires in three months.
This gives you the right but not obligation to buy Bitcoin any time in three months for $40,000.
You need to pay a premium for this option, for example, $1,000.
If in three months BTC trades at $50,000, you will exercise your option to buy BTC at $40,000, and you will realize $9,000 profit (50,000 – 40,000 – 1000 (premium paid)).
The $1,000 premium factors in the option’s extrinsic value; many things can happen in those three months, and the likelihood of BTC reaching $50,000 is likely to happen.
But let’s say you buy the option with the same strike price that expires in three days instead of three months.
The likelihood of any significant move in those three days is much smaller than in three months; therefore, the premium will be much smaller, and the time decay (Theta) will affect your option much more.
The Theta will always be negative-going against the trader as time only moves in one direction.
When you buy an option with three months to expiration, time decay will be slow at first but rapidly accelerates towards the expiration, usually in the last 30 days.
Besides the time, there is also implied volatility that makes the option’s extrinsic value.
This was already covered in the article before; options with higher Implied volatility are more expensive as they offer more room for price to move.
To translate this to trading Move contracts, it is important to understand that closer you are towards the expiration, the less valuable the move contract is if you are a buyer.
If you take a long at daily move contract with a strike price of $40,000 in the morning and underlying moves to $41,000, your uPnL will be bigger opposed to the same move from $40,000 to $41,000 if it would happen two hours before the expiration as the contract itself is highly affected by time decay at that point.
Longing the Move Contract
Long positions on Move contracts should be executed when the market is in tight compression and trading close to the strike price.
You are anticipating volatility to happen, but you are not exactly sure of the market’s direction.
If you look at the 5minute chart above, the market was trading in the balance after the weekend and compressing between two trend lines.
This is an excellent signal of upcoming volatility, but some may not be set in the market’s direction.
If we look at BTC-MOVE-0322, which expires on Tuesday 22nd of March Daily close, we can notice the strike price being $41,000, which is approximately at the middle of the balance area.
This gives you a great long opportunity to express a view on upcoming volatility with your highest risk the premium paid that is around $1000 for 1BTC bought in long Move.
As you can see, Bitcoin moved briefly after, and your Move contract position would result in profit.
In this case, Bitcoin moved up approximately 2000 points to $43,000.
Direction is not important as if BTC would fall 2000 points to $39,000, you would realize the same profit.
Shorting the Move contracts
There are two scenarios you would be shorting the volatility.
was already described in this picture.
If Bitcoin moves from its strike price of $41,000 to $43,000 and you expect the price to return to the mean, you can express this opinion by shorting the Move contract.
Suppose Bitcoin returns to $41,000. You will capture the premium of $2000 on the 1BTC Move Contract.
Let’s say this is the Daily move contract you are trading, and there are 5 hours left to expiration.
At the expiration, Bitcoin is still trading at $43,000.
Although underlying did not move at all, you will still end up in profit as the value of Move contracts goes down due to time decay.
Trading the Move Contracts
In the crypto space, trading volatility is a complex subject that is not completely appealing to average dog shitcoin enjoyers.
Because of that, liquidity is much thinner than other Bitcoin markets, such as perpetual futures or deribit options.
This might bring the question of why to even trade Move contracts in the first place instead of buying or selling straddles.
In my opinion, there are two reasons for you to trade Move contracts instead of options.
First of all, options trading is way more complex and harder to learn, so the Move contract offers the bigger “retail friendliness”.
The second reason would be overall cost; if you buy or sell a straddle, you pay the bid/ask four times instead of just buying and selling the Move contract, which is overall cheaper.
Also, if you sell options, you must provide large margin requirements in case trade goes against you.
There are pros and cons of both; I would say that options offer much bigger efficiency and room to manage your trades by adding more legs to your trade, so it is something worth exploring.
If you decide to stick with Move contracts, liquidity tends to be relatively thin, especially in weekly and quarterly contracts.
Because of that, simply smashing market orders when you get in and out of the trade might not be the brightest idea.
Watching the order book and slowly executing your order is well advised. You can experiment with the TWAP tool offered by Insilico Terminal, which automates this process for you.
Volatility trading is something worth exploring.
You can make money when you think Bitcoin will move, but you don’t know which way, but you can also benefit from the “crab” market, which tends to be a killer of most traders.
Before you start trading these Move contracts, you should take your time to understand how they work correctly, so make sure to read all the necessary documentation first.
Alternatively, Move contracts are also offered by Delta exchange, but I never personally traded there; therefore, I have no idea if they are the same as the ones offered by FTX.