FTX MOVE Contracts | Profitable Mechanics explained

What are MOVE contracts?

MOVE contracts are a unique derivative offered on the trading platform known as FTX.

In contrast to futures contracts, MOVE contracts reflect the absolute change of Bitcoin's price over a time before the contract expiration date. They have advantages and drawbacks that a player may weigh against his open futures positions.

Disclaimer

You have learned in school, on television, or on YouTube how to visualize atoms, protons, neutrons, electrons, etc.

This model is entirely inaccurate, yet we use it because it helps us visualize the specifics of these abstract subjects.

Consider everything in this article to be an oversimplification to assist you with more advanced reading about options trading (MOVE contracts are basically options straddles)

Buying MOVE contracts ensures that we profit if Bitcoin's price changes substantially either way.

If a daily MOVE contract begins at $500 and the BTC price changes by $300 before expiration (of the day), This MOVE contract will expire at $300, whether Bitcoin's price changes in one direction or another.

If BTC remains to fluctuate within a range, we profit by short-selling MOVE or yield returns.

You are not required to be either bullish or bearish. You maintain a market-neutral stance, and it is a matter of volatility.

Consider a situation in which you anticipate a significant change in Bitcoin's price due to a news event but are unsure whether it will go up or down. Numerous traders attempt to depict the direction and lose by picking the wrong direction due to false breakouts.

You probably know this meme to bet your direction.

A video by FTX (note: the video is for marketing purposes and oversimplified)

video introduction

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Type of MOVE contracts

MOVE contracts classification into three categories by FTX.

Daily MOVE contracts t slowly adjust throughout the day. This type of contract expires at the end of the day to the percentage increase of Bitcoin's price.

Weekly MOVE contracts adjust to the trend at the end of the week of Bitcoin's rate movement. We can also refer to this contract as one that expires at the end of the week to the absolute amount that Bitcoin's price has moved from the starting price.

Quarterly MOVE contracts will expire at the end of three fictitious months to the absolute price movement of Bitcoin.

MOVE Expiration

MOVE contracts expire at the absolute change of the piece over the first hour and the final hour of expiry time, measured in UTC. In simpler terms, the strike price is the first price of the contract.

TWAP stands for a time-weighted average price.

So, for example, BTC-MOVE 2018–08–30 expires to ABS[ (BTC Index TWAP from 2018–08–30 23:00:00–23:59:59 UTC) — (BTC Index TWAP from 2018–08–30 00:00:00–00:59:59 UTC) ].

It uses the average price between 00:00:00 and 00:59:59 UTC as the expiry price. FTX is using a TWAP to prevent affecting the underlying asset's price

MOVE contracts expire at the difference between the final hour and the initial hour. Imagine if the strike price starts at $7000 and BTC is at $7500 in the last hour, and the MOVE contract expires at $500.

To be more precise, it uses the average price between 00:00:00 and 00:59:59 UTC as the expiry price.

If you've been trading Bitcoin Options on Deribit, and this sounds oddly familiar to staddles, you're right.

If you aren't familiar with Bitcoin Options, watch this video as an intro.

A straddle is a delta-neutral strategy, simultaneously buying a put and a call option on the same underlying with the same expiration date. Both the put and call options have the same strike price.

A reasonable video about Straddles

A reasonable video about Straddles

A trader can close his MOVE contract position, and he does not have to wait for the expiration date.

A trader will profit from a long straddle when the price rises or falls from the strike price by an amount. The profit can be unlimited if the underlying asset's price moves sharply.

A long straddle would be equal to going long on a MOVE contract.

In options, a long straddle would look like this. You make a profit if the price moves in either direction. But there's only profit if the price moves enough in either direction, and if it doesn't, you lose money.

Long straddle on Deribit

A trader will profit from a short straddle is when we expect not much volatility at the option expiration. You can use a straddle when we wish minimal movement, and you want the price to settle close to the "strike price."

A short straddle would be similar to going short on a MOVE contract. A trader profits if the contract expires between the range.

short straddle on Deribit

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Why MOVE contracts instead of Options?

MOVE contracts work similarly to straddles.

The strike price starts at the beginning of the day and expires at the end of the day. (UTC).

Therefore, why did FTX offer MOVE contracts rather than options like Deribit and Okcoin/Okex?

"Retail traders do not widely use options; in fact, most retail traders in crypto have never traded options. FTX aims to offer centralized liquidity", as mentioned by FTX CEO Sam said.

I think it's more important to know that retail traders do not use options or end up in a disaster because they do not know the sensitivity to implied volatility.

The disadvantage of having so many different options with such a wide variety of strike prices and expiry dates on various exchanges is that market makers find it challenging to manage. Liquidity, positional risk, and risk are all fragmented. FTX MOVE is a more appealing solution for retail, and it results in a less liquid trading environment.

Consider that April and your straddle on Deribit expire in June; there may be insufficient liquidity, forcing you to wait until expiry. This may be an unpleasant experience for some.

Additionally, MOVE contracts include a chart. The concept is simple, and you may trade long or short contracts. MOVE contracts have the potential to attract more traders.

At aggressive 5, 10, 20% price moves on BTC, and MOVE contracts can go 2x, 5x, etc., the price moves rapidly due to "Gamma." If BTC remains "unchanged" for the day, a MOVE contract may fall to around zero.

MOVE's price may fluctuate by a few hundred dollars to BTC. However, in percentage terms, this figure may be much larger.

The risk engine will treat 1 MOVE contract as 1 BTC.

You can get liquidated if you short-sell these contracts. Shorting volatility is a risky game and should never be underestimated.

Time decay/Theta Θ

There is a time value and an intrinsic value on a MOVE contract. As time passes, the time-value portion gradually disappears until the MOVE contract is worth just the intrinsic value.

The Theta (Θ) or "time decay" is the rate at which an option loses value over time, assuming all other market circumstances stay constant. If the Theta value is negative, the MOVE contract will lose value.

An option with a theta of 0.05 will lose 0.05 in value for each day that passes with no movement in the underlying contract. If its theoretical value today is 4.00, one day later, it will be worth 3.95, and two days later, it will be worth 3.90.

When opposed to buying put options, selling calls has a higher profit probability. If the price stays steady or even slightly rises, the short call remains lucrative (not much). If you purchased a put option, the magnitude of the price must make a significant downward move.

Options and MOVE contracts are depreciating assets, and option prices fall with time. You have time on your side when selling calls or MOVE contracts. Even if the underlying price does not change, the price of the MOVE contact will decrease with time.

The time value of a daily move contract is (mark price — projected expiry price). If a MOVE contract is nearing its expiry date, we may anticipate a larger time value since the MOVE contract has a greater chance of increasing or decreasing in value.

The time value gradually decreases. A $6.7 difference between MOVE and the predicted expiration price (75–68.3 = 6.7)

Profit by shorting FTX MOVE contract

Profiting from shorting a MOVE contract is most easily accomplished by betting on volatility returns. For instance, BTC fluctuates between $8000 and $7400 throughout the day.

You anticipate the price returning to $8000 or a little higher. You may short MOVE with the expectation that the BTC price would return to the level at where the daily candle started. Profiting from volatility callback is the purpose of this strategy.

Profit/Loss calculations on MOVE contracts

For a buyer to profit

X = cost paid for MOVE contracts

S = Strike price

P = Index price

P-S = predicted expiration price

EP = expiration price

If the Strike Price is 7000 and the cost paid for the MOVE contract cost was 150

S-X=

7000–150 = 6850

S+ X =

7000 + 150 = 7150

If the price stays between 6850–7150, you make a loss, and if the price moves further than either direction, you make a profit.

If you want to dive deeper into calculating profit

| EP-S |-X =

| 8000–7000 |-150 =

= 850

The buyer profit if either statement is true

EP< S-S or EP > S + X

The buyer loses

S-X < EP< S + X

The maximum loss is X (cost paid for MOVE contracts). The potential profit is unlimited.

Long on a MOVE contract (graph by crypto.oli)

If the Strike Price is 7000 and the cost paid for the MOVE contract cost was 150

S-X=

7000–150 = 6850

S+ X =

7000 + 150 = 7150

In this case, if the price stays between 6850–7150, the seller makes a profit.

the seller net income formula

X -| EP-S|

When the expiration price EP is between S -X and S+X, that is,

S-X < EP< S + X, the seller makes a profit

The seller makes a loss when either statement is true

EP < S -X, or St > S + X

the seller has a net loss.

When shorting, your maximum profit is X (cost paid for the MOVE contract), This profit is limited, but your loss can be unlimited.

Short on a MOVE contract (graph by crypto.oli)

As you see, it kind of works like strangles in options.

Now, this looks different compared to Options on Deribit.

Suppose you buy MOVE contracts with a strike price of 7000. Bitcoin's price is quickly approaching 8000. MOVE pumps erratically, and since MOVE is less expensive than BTC (for example, $200), MOVE skyrockets to $1200.
That is an excessive gain.

There is a possibility that BTC may fall from 8000 to 7000, and the price of MOVE will "reset" to 0.

Traders who purchased MOVE over 1000 will suffer a significant loss.
However, you could be a seller and short MOVE about 1200, riding it down to potentially zero, with time on your side because of time decay.

Short MOVE instead of shorting BTC futures?

Now consider how BTC is doing throughout the week. You believe the top is in, and the time is 1 p.m. UTC+1 on Wednesday. You think the price will revert to Monday/weekly open levels.

Should you short BTC futures or FTX's MOVE contract this week? Which one has a greater chance of profitability, and why?
The solution is to abbreviate MOVE!

Why? Theta/Time decay.

Consider that you want to start this short at $9k, but the weekly open price was $8.3k.

If BTC eventually reverts to $8.6k, you will still benefit since the MOVE contract's price has decreased because of time decay.

Now suppose if BTC had not decreased in value at the end of the week. Rather than that, the price is $9100. You continue to benefit from your MOVE contract! MOVE's price decreased owing to time decay.

The price of MOVE went down due to time decay. Now imagine that BTC did not go down at all before the end of the week. Instead, the price is $9100. You are still profitable on your MOVE contract!

How to profit from Theta decay? (Theta Gang)

When the time value of MOVE is low, you may short sell it and profit from time decay/theta.

Shorting MOVE when the time value is low is a gamble on volatility callback (Price reverse in the opposite direction).

To profit from time decay/theta.

X-S

The larger X-S, the greater the profit possibility from shorting. With this reasoning, you can see that sellers have a greater chance of profiting when MOVE contracts open. Keep in mind your position goes against you rapidly when volatility increases as time decays.

θ

Implied volatility

There is also a MOVE contract for the Next day, Next week and next quarter. You can already trade those (before the day or week is in) and speculate about the volatility or "implied volatility."

Unlike realized volatility, which is calculated from price changes in the underlying contract or BTC

In a sense, the implied volatility represents the market expectation of what the future realized volatility of the underlying contract (BTC) would be over the life of the MOVE contract.

More specifically, it measures how much a MOVE contract goes up or down if the price of bitcoin goes up or down by 1%.

So if we think we know that the BTC price will go up by 1% throughout the contract, we should buy a contract with high implied volatility.

We should buy a contract with low implied volatility if we know that the BTC price will go down by 1% throughout the contract.

When a contract expires, its expiration date is set in the future, and the expiry date is predetermined.

Implied volatility indicates the anticipated price fluctuation over time, known as volatility.

Implied volatility crush (IV crush)

High implied volatility occurs when traders are uncertain whether prices will rise or fall, implied volatility increases.

When traders are uncertain about the direction in which the prices will go. Possibly before news releases, and they are more likely to buy MOVE contracts because of the dual directionality.

If the expected move either up or down with magnitude doesn't occur, it can "crush" the other side's volatility expectation.

IV crush

I wrote a tool at the end of June 2020 to analyze FTX daily MOVE Contracts for myself and decided to opensource it.

This tool is for FTX daily MOVE contracts. It analyzes all daily MOVE Contracts from the current year and shows the average expiration price of all daily MOVE Contracts. Not only that but also by weekday average and by months. For example, some days are more volatile than others, and data suggest that weekend days usually expire below the average expiration price. This tool can give you an edge.

Source code: https://github.com/romanornr/ftx-move-contracts

Free alpha

You can use FTX subaccounts. Nervous about trying it out? Afraid it could affect your collateral/account?

Subaccounts help isolate margin positions from each other and limit your maximum risk exposure from a margin position.

Delta exchange offers MOVE contracts for bitcoin, ethereum & link

If you’re seeking to signup and want a 10% discount

You can use my referral link

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Delta exchange MOVE contracts

As mentioned before, Delta exchange offers MOVE contracts for bitcoin, ethereum & link

BTC, ETH, BNB & Link

FTX attempts to entice ordinary investors by offering MOVE contracts rather than vanilla options like Deribit does. The MOVE contract mechanisms are FTX-style "simplified" straddle attempts with controlled liquidity.

At the start of the day, activity is often low since buyers prepare to wait due to the high time value of their MOVE contracts and the possibility of "overpaying" for them. As time passes, it gets more appealing for buyers to enter.

Despite what FTX tries to achieve, retail normie traders won't understand how MOVE contracts work. They will get liquidated. Looking at the chart can be a distraction, don't forget that these MOVE contracts are straddles. To have some edge in the market, basic knowledge about straddles in vanilla options is required.

If you don’t have an FTX account, use my link to get a 10% discount instead of the normal 5% discount from others.

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More medium articles?

If you are looking for more medium articles like this written by me, you can find them here.

also my Twitter: https://twitter.com/RNR_0

But here's a list anyways:

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My take on NFTs: Overview, Explanations, Interesting Projects, and Predictions

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THE LIBRA PROPOSAL

Bitcoin Sociology — 101

Daily Bit #179: Better Planets with Blockchain

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