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Gnulpie Minmatar Miner Tech	Posted - 2011.02.12 12:01:00 - [1] What do you think about call options (the right to buy a certain amount of specified item for a defined price at a precise point of time)? And what do you think about sell options? Do they need to be covered, is that not necessary? A new interface to trade with options would be necessary, something like a stock exchange. Example: I sit on a huge pile of stuff which I want to sell later for a better price. I could wait all the time, sure. Or I could sell call options to other people, giving them the right to buy (small) packages in the future from my huge pile for a certain price. When the price in the future is above the agreed price in the option then those people make a nice profit, if not then I make the profit. You make can do that now, but it is very cumbersome and no fun at all, plus it is completely intransparent and totally unsecure - so in essence no one is doing that. But options would allow people to speculate on the market without having a huge pile of money. It also would allow additional income to those who sit on large amounts of stuff. It also allows for new fun toys for the market guys. And it might attract a lot new players, especially those who are more interested in market and financial games and less interested in internet spaceship stuff.
Jagga Spikes Minmatar Tribal Liberation Force	Posted - 2011.02.12 12:22:00 - [2] what happens when someone can't pay or deliver? ISK nor goods can't be created out of thin air just to insure validity of contract. unless there is a way to enforce debt, what good would such an option be? ________________________________ : Forum Bore 'Em : Foamy The Squirrel - [jedi handwave] "There is no spoon."
Gnulpie Minmatar Miner Tech	Posted - 2011.02.12 12:34:00 - [3] Originally by: Jagga Spikes what happens when someone can't pay or deliver? ISK nor goods can't be created out of thin air just to insure validity of contract. unless there is a way to enforce debt, what good would such an option be? That depends if you have covered or uncovered options. With covered call options for example you need to deposit the items and they are secured (stored into the option if you want to say). It is like a 'want to sell'-contract of EVE where your stuff goes into the contract also, just that you can't accept the contract now but only in the future. With covered call options you need to deposit the money, again, just like a 'want to buy'-contract. Your money goes into the contract then too. Uncovered options are different. You only need a fraction (up to zero) deposit aforehand. But that type of options wouldn't be good for EVE in my opinion. Since the buyer of the options buys the RIGHT (but not the obligation!) to buy or sell, no deposit on his side is necessary. If he can't afford to use his right then the right is just forfeit.
Lederstrumpf	Posted - 2011.02.12 12:56:00 - [4] Edited by: Lederstrumpf on 12/02/2011 12:56:21 Originally by: Gnulpie Originally by: Jagga Spikes what happens when someone can't pay or deliver That depends if you have covered or uncovered options. Someone not being able to pay/deliver is not the result of things being covered.
Jagga Spikes Minmatar Tribal Liberation Force	Posted - 2011.02.12 12:58:00 - [5] you already have covered option. put you items into contract and ask for money. or put your money into contract and ask for items. cargo space is free and (effectively) unlimited. there is no difference between having items now or then. now, what would be interesting is ability to "reserve" contract/order. kind of, paying deposit to state intention of fulfilling transaction within limit of time. contract/order would be temporarily removed from market. if you fail to pay/deliver, you lose deposit, order/contract gets returned to market, and, possibly, owner gets certain compensation (valued at less than deposit). if you honor transaction, it resolves as per normal rules. i could see some interesting interactions with this :) ________________________________ : Forum Bore 'Em : Foamy The Squirrel - [jedi handwave] "There is no spoon."
Tasko Pal Spallated Garniferous Schist	Posted - 2011.02.12 14:33:00 - [6] Cash-or-nothing binary contracts would capture a lot of what's going on here. For example, a share might pay you 100 isk, if tech has an average price in The Forge over $85k on a certain date, or 0 isk, if it doesn't. They aren't perfect substitutes, but they're good enough for hedging or speculation. And their limited exposure (you can only lose a maximum of 100 isk in the above example) makes them a viable security for a market with no margin to provide.
Gnulpie Minmatar Miner Tech	Posted - 2011.02.12 14:45:00 - [7] Originally by: Jagga Spikes you already have covered option. put you items into contract and ask for money. That isn't an option because you can accept the contract right now. An option involves always that you can accept it only at a point in the future. Besides you should be able to trade with options too ;) But you are right, the basic mechanism to implement options is given with contracts.
Jagga Spikes Minmatar Tribal Liberation Force	Posted - 2011.02.12 15:10:00 - [8] Originally by: Gnulpie Originally by: Jagga Spikes you already have covered option. put you items into contract and ask for money. That isn't an option because you can accept the contract right now. An option involves always that you can accept it only at a point in the future. Besides you should be able to trade with options too ;) ... basically, you reserve order/contract and put it back on market at higher value. you would need only enough ISK for deposit. when transaction resolves, you get deposit back, original owner gets their ISK/goods, and you pocket the difference. ________________________________ : Forum Bore 'Em : Foamy The Squirrel - [jedi handwave] "There is no spoon."
SHAGMOZ	Posted - 2011.02.12 20:03:00 - [9] Interesting idea you are proposing, however american options (at least in the real world) can be exercised (contract accepted) at ANY time before expiration. Of course, because of time and volatility in the underlying they are almost always sold and not exercised before expiration. You would more likely be looking at futures contracts then options it might make more sense. The contract system in eve I am sure could be improved to accomodate futures contracts quite easily. Whats interesting about the futures contract is that expiration usually involves delivery of the commodity which is easy for the current contract system to do. The issue I see is margin, even the current margin skill for traders leaves a lot to be desired....all that happens if you don't have enough funds in your wallet is your order gets canceled if someone trys to fill it....and it is actually used as a scam eve trading. Anways I was just providing a little food for thought then trying to figure this all out :) Intersting topic though. Shagmoz
Gnulpie Minmatar Miner Tech	Posted - 2011.02.12 20:17:00 - [10] Originally by: SHAGMOZ Interesting idea you are proposing, however american options (at least in the real world) can be exercised (contract accepted) at ANY time before expiration. Of course, because of time and volatility in the underlying they are almost always sold and not exercised before expiration. You would more likely be looking at futures contracts then options it might make more sense. The contract system in eve I am sure could be improved to accomodate futures contracts quite easily. Whats interesting about the futures contract is that expiration usually involves delivery of the commodity which is easy for the current contract system to do. The issue I see is margin, even the current margin skill for traders leaves a lot to be desired....all that happens if you don't have enough funds in your wallet is your order gets canceled if someone trys to fill it....and it is actually used as a scam eve trading. Anways I was just providing a little food for thought then trying to figure this all out :) Intersting topic though. Shagmoz Quite interesing ideas, thanks! The problem with futures is that they are a binding obligation for seller AND buyer. Whereas with options only the seller has some binding obligations and the buyer is free to execute his right or let it forfeit. In general I think the implementation in EVE shouldn't be that difficult. We have most of the stuff already there - the contract system and a market.
Implied Volatility	Posted - 2011.02.12 21:18:00 - [11] Edited by: Implied Volatility on 12/02/2011 21:22:53 You can do it with a simple courier contract. The gotcha there is the object will have to be moved (no further than an in-system warp will suffice) to cancel the option by completing the contract for the return of the collateral. Also, traditional options are often traded on margin. This isn't possible with a collateral-covered courier option. Neither party has use of 100% of the locked-in collateral or goods for the duration of these option. One upside of using courier contracts is, there's virtually no max duration. I put one up with a 365 day time-to-deliver this morning. I tried this a couple months ago with 1-month PLEX options but there was little interest and stupids kept running the courier contracts for 10k reward (on 350m collateral ). This got me thinking there might actually be courier bots running jobs. Or just a high saturation of morons. edit: if CCP were kind and forward thinking they would give us a real contract type for this rather abstract form of trading.
Margraves	Posted - 2011.02.12 23:46:00 - [12] It would be kinda interesting/easy to make a contract for this sort of thing, though I'm not sure what the implications would be on a macro scale for the way I envisioned it: 1) Contract MAKER purchases items... any items...* 2) MAKER builds contract with terms (Call date/length, underlying assets, redemption, strike price, option cost, terms, etc) 3) MAKER posts contract 4) All items included in the contract are placed into ESCROW controlled by CCP/NPC* 5) Contract BUYER purchases contract, paying the cost of the option 6) At STRIKE DATE the buyer has 2-3 options (depending on the contract) a) do nothing if the strike price is higher than market, b) pay cost and have goods delivered and then haul/whatever, or optionally c) the SELLER could have set an option to buy back at market value so there would be no need for delivery and subsequent hauling/logistics if the BUYER opts for this and the MAKER has escrowed the amount (possibly). * Items would have to be clearly visible, packaged, items (no Ravens named "Navy Issue" or whatever) Contracts should prolly have security requirements, like based in 0.5 and above, or at least not available publicly in player owned stations. Also, the contract should be "final" when it's accepted by BUYER to avoid ppl pulling money and offers when it looks like a loss. * Escrow account works to keep people honest, no chance of having the MAKER unable to come up with goods (it's already in escrow) and the buyer has already paid for the option and is under no requirement to purchase. Let me know what you think, I've been pondering how options could happen for ages now.
Dethmourne Silvermane Gallente Northstar Cabal R.A.G.E	Posted - 2011.02.13 00:26:00 - [13] Dumb question, I suppose.. Why do we need options? I understand their usage in IRL, to an extent (hedging against rising/falling prices on inputs/outputs), but I don't see where that's nearly as useful in EVE.
Mini Tee	Posted - 2011.02.13 08:59:00 - [14] Edited by: Mini Tee on 13/02/2011 09:03:56 The problem with this and any other levered product in EVE is that debts can't be enforced and your bank balance can't go negative. With IRL futures the price fluctuates because there is an underlying value bound to the goods, you can actually request delivery of the goods. This would only work if trusted corporations joined together and would start selling futures, since there is no way to enforce delivery like IRL with laws etc. Same goes for buyers, who only have to put up a small amount of the actual price for leveraged products, which means that if they request delivery they have to put up the full sum, IRL this is possible because there is debt and if you can't pay there will be legal repercussions. In eve you'd have to pretty much put full price as collateral which would void the point of having leverage in the first place. Tho the side from the buyer could be fixed if the market was liquid enough to use margin calls where the seller side is not hurt, margin call -> position is closed, meaning there has to be someone at the other side willing to buy up all those contracts that just got freed up due to the margin call. If not the position might go even further against the margin caller with no buyers, and he'd lose more than his deposit, which comes back to the debt question. Also people like farmers use futures to sell their crop before it is even planted, so a contract system which would require you to have and put up your goods you would want to sell in 1 month wouldn't have the required appeal imo.
Da Trader	Posted - 2011.02.13 10:55:00 - [15] Start with futures then move to options, IMHO.
Vaerah Vahrokha Minmatar Vahrokh Consulting	Posted - 2011.02.13 12:39:00 - [16] Originally by: Da Trader Start with futures then move to options, IMHO. QFT. Sadly MD is not ready to level up to the next steps in finance. It's gamers after all, not real investors. I believe the only way to introduce advanced finance is to find EvE situations where using it brings advantages over "regular gaming". I found it once, by proposing an insurance against collateral depreciation (you easily see the connection with futures and options) but that's just one case. Gotta find more before people spend their brains on derivatives. - Auditing & consulting When looking for investors, please read http://tinyurl.com/n5ys4h + http://tinyurl.com/lrg4oz
Gnulpie Minmatar Miner Tech	Posted - 2011.02.14 06:31:00 - [17] Originally by: Da Trader Start with futures then move to options, IMHO. What would be the advantages of futures compared to options? What would be the disadvantages of options?
Da Trader	Posted - 2011.02.14 13:08:00 - [18] Originally by: Gnulpie What would be the advantages of futures compared to options? What would be the disadvantages of options? Just to follow the steps, one by one. 1. now we have spot contracts = isk vs goods now 2. futures are isk now vs goods in future 3. option is future contract which is right not obligation.
Gnulpie Minmatar Miner Tech	Posted - 2011.02.14 14:45:00 - [19] Originally by: Da Trader Originally by: Gnulpie What would be the advantages of futures compared to options? What would be the disadvantages of options? Just to follow the steps, one by one. 1. now we have spot contracts = isk vs goods now 2. futures are isk now vs goods in future 3. option is future contract which is right not obligation. Right, that are futures. But what would be their advantage over options in EVE? And why would you prefer them over options? That the option is a right and not an obligation (as in futures) might be more fun maybe, and less isk intense. Why to have futures or options at all? Same reasons as in real life. Making it easier for suppliers and producers (buy stuff now, produce in the future and don't worry about material price volatility - just the classical hedging). And of course having some new fun toys for investors and the market guys (when was the last time they got something?). This could take production and the market to a whole new level!
Da Trader	Posted - 2011.02.14 18:08:00 - [20] Originally by: Gnulpie what would be their advantage over options in EVE? And why would you prefer them over options? I only state that we should make small steps, not big leaps.
GreasyCarl Semah	Posted - 2011.02.14 21:03:00 - [21] You can do this now but you need a clearing house and a trusted escrow agent. Keep in mind that options would give a buyer the right but not the obligation to perform. So essentially your collateral needs to come from the seller of the option. That is, if the buyer can't perform on an option then who gives a damn, it is a net win for the seller since they pocket the contract premium. The sale of calls would require the seller to escrow an amount equal to several times the value of the contract or the physical materials. The risk to the contract seller is unlimited, thus any amount of cash would have to be significant. If the buyer is "in the money" in his position when the contract expires and he can't perform, then who cares, the seller sold the contract up front, got the contract amount through the clearing house and gets his goods back. If the contract buyer performs then he sold his goods at the price he agreed upon. On the other hand, the seller of a put is limited in his risk to the put price. He puts up his money and it sits.
Salome Musashi Caldari Aura of Darkness Nulli Secunda	Posted - 2011.02.15 03:07:00 - [22] Originally by: Dethmourne Silvermane Dumb question, I suppose.. Why do we need options? I understand their usage in IRL, to an extent (hedging against rising/falling prices on inputs/outputs), but I don't see where that's nearly as useful in EVE. An excellent question, actually. I don't think options/derviatives would work well in Eve, mostly because a 'crop' can be 'harvested' in a week or less, but also because there's no penalty for holding onto goods for long periods of time. CCP could find a good way to implement the mechanics easily enough if they wanted to, and I'll bet a PLEX that Dr Eyjo has already thoroughly researched this question anyway.
Gnulpie Minmatar Miner Tech	Posted - 2011.02.15 07:58:00 - [23] Originally by: Salome Musashi Originally by: Dethmourne Silvermane Dumb question, I suppose.. Why do we need options? I understand their usage in IRL, to an extent (hedging against rising/falling prices on inputs/outputs), but I don't see where that's nearly as useful in EVE. An excellent question, actually. I don't think options/derviatives would work well in Eve, mostly because a 'crop' can be 'harvested' in a week or less, but also because there's no penalty for holding onto goods for long periods of time. There is also no decay of items like steel, coal, currencies etc. Still the RL economy profits from hedging these items. Why? Because the producer can plan better. In EVE you could for example protect yourself against rising mineral prices if you are a producer. Or you could protect yourself against rising product prices if you are a consumer. As miner you can protect yourself against falling mineral prices and as producer you can also protect yourself against lower product prices. Options has nothing to do with decay of the unterlying goods but with the volatility of the price for these goods. Usually you can't have such things in MMO's because they don't have any reasonable big enough free market. EVE is different though - we have a really good market, large and with enough volume. And with price volatilites too which makes a protection against them desirable - or speculating with them interesting. And the best thing is that the implementation should be pretty easy with the already existing contract system - it would need only minor adjustments.
Jagga Spikes Minmatar Tribal Liberation Force	Posted - 2011.02.15 10:20:00 - [24] Originally by: Gnulpie Originally by: Salome Musashi Originally by: Dethmourne Silvermane Dumb question, I suppose.. Why do we need options? I understand their usage in IRL, to an extent (hedging against rising/falling prices on inputs/outputs), but I don't see where that's nearly as useful in EVE. An excellent question, actually. I don't think options/derviatives would work well in Eve, mostly because a 'crop' can be 'harvested' in a week or less, but also because there's no penalty for holding onto goods for long periods of time. There is also no decay of items like steel, coal, currencies etc. Still the RL economy profits from hedging these items. Why? ... there most certainly is decay on steel and coal. storage has cost in RL for a reason. ________________________________ : Forum Bore 'Em : Foamy The Squirrel - [jedi handwave] "There is no spoon."
Vaerah Vahrokha Minmatar Vahrokh Consulting	Posted - 2011.02.15 10:47:00 - [25] Imho the examples above are good but the root of the issue is this: Trading is a PvP game. With the current system, you straight win or lose. With futures / options, one of the 3 involved parties (one being a broker) WILL lose. There are no mechanisms to make people forcibly loose money upon a certain condition. Sure you can try doing some contract tricks but the whole thing is not practical, it just does not work with the current mechanics. What can happen is: - guy who "promised" to buy at price X on date Y sees he did it wrong. He just won't accept any contract nor pay. - opposite case: the other guy, who "promised" to sell at price X on day Y sees he did it wrong. He keeps his stuff / cancels the contract. Therefore the one way to do it in EvE afaik is to use the broker as collateral holder and impose the deal. Who's going to play broker? And be trusted to hold maaaany billions? - Auditing & consulting When looking for investors, please read http://tinyurl.com/n5ys4h + http://tinyurl.com/lrg4oz
Da Trader	Posted - 2011.02.15 11:28:00 - [26] Originally by: Vaerah Vahrokha Who's going to play broker? And be trusted to hold maaaany billions? Me
Jagga Spikes Minmatar Tribal Liberation Force	Posted - 2011.02.15 11:45:00 - [27] Originally by: Vaerah Vahrokha ... What can happen is: - guy who "promised" to buy at price X on date Y sees he did it wrong. He just won't accept any contract nor pay. - opposite case: the other guy, who "promised" to sell at price X on day Y sees he did it wrong. He keeps his stuff / cancels the contract. ... this. tho, if there was deposit (partial collateral) required at the time of contract creation, they might consider delivering/paying, instead of losing deposit. ________________________________ : Forum Bore 'Em : Foamy The Squirrel - [jedi handwave] "There is no spoon."
GreasyCarl Semah	Posted - 2011.02.15 15:32:00 - [28] Edited by: GreasyCarl Semah on 15/02/2011 15:34:17 As I said above, the way around these problems is to fully collateralize the position from the option seller's side. The option seller gets paid a fee at the time the contract is sold so he gets an instant return on his collateralized assets. In the case of a sold call position, the collateral would need to be quite large because the seller's risk is unlimited, whereas in a put position, it should only need to be the maximum amount of the put. The buyer of the option can execute at anytime or not execute at all. If he executes he has to produce his ISK at the time of execution so that side of the transaction doesn't need to be collateralized. Upon execution, the buyer of the option can elect to settle with a physical transfer of the collateralized goods or settle purely in ISK. Settlement with physical goods may present a problem in game though, as the goods would have to be stored where they can be easily liquidated by the clearing house, at the outstanding market price.
Gnulpie Minmatar Miner Tech	Posted - 2011.02.16 13:11:00 - [29] Originally by: GreasyCarl Semah As I said above, the way around these problems is to fully collateralize the position from the option seller's side. Yes, exactly. Covered options (options that are fully covered by the seller of the option, either with wares in case of a selling a put option or with isk in case of selling a call option) are the easiest way to go. In theory you could have also uncovered options but then you need some sort of easy mechanism to see the history of emittents so that you can build up a reputation of being a solid institution that do not fail to deliver (at least not before the HUGE scam ). Originally by: GreasyCarl Semah The option seller gets paid a fee at the time the contract is sold so he gets an instant return on his collateralized assets. The seller only gets the amount which buyers are willing to pay. The more the option is 'in the money' the more money he will get upfront. And yes, that fee is an additional income. Another advantage besides the hedging part. Originally by: GreasyCarl Semah In the case of a sold call position, the collateral would need to be quite large because the seller's risk is unlimited. A call option is the right to buy something for a fixed price. If a call option is sold, then someone else has the right to buy stuff for a certain price. The collateral would be the good which is offered in the option. The seller of the call option would need to deposit the good "into" the option (like depositing stuff into sell contracts now). The practical risk is completely limited to these goods. The theoretical unlimited loss arises because the seller could have maybe sold the stuff at some future point to a potentially unlimited price. But that doesn't mean anything for collateral of fully covered options. Originally by: GreasyCarl Semah In a put position, [the collateral] should only need to be the maximum amount of the put. A put option is the right to sell something for a fixed amount. So the seller of the covered put option need to deposit the money that is necessary to buy the whole stuff. You described it the same way. Originally by: GreasyCarl Semah The buyer of the option can execute at anytime or not execute at all. If he executes he has to produce his ISK at the time of execution so that side of the transaction doesn't need to be collateralized. I see it the same way. If the buyer has no isk to execute the option he either sells it to someone else who has the money or he must forfeit it (which would be stupid). Originally by: GreasyCarl Semah Upon execution, the buyer of the option can elect to settle with a physical transfer of the collateralized goods or settle purely in ISK. In case of executing a call, the executor should deliver the isk and get the goods. In case of executing a put, the executor should deliver the goods and get the isk. Dropping the good-exchange for a pure isk-exchange doesn't sound like a good idea to me. Originally by: GreasyCarl Semah Settlement with physical goods may present a problem in game though, as the goods would have to be stored where they can be easily liquidated by the clearing house, at the outstanding market price. That is a good point! An unchangable point of exchange/delivery of the good must be stated clearly visible in the option (like in contracts). Thanks for the good input so far! The whole option stuff seems to be very similar to contracts, only some tweaks necessary: That they are a market item with a variable price, that you can trade them on the market (best on a seperate stock market), that you can't cancel them once in the market etc.
GreasyCarl Semah	Posted - 2011.02.16 15:44:00 - [30] In regard to the situation with a sold call, I was thinking that the seller could either deposit the physical goods or a sum based on the physical goods' value. That sum would be some multiple in order to mitigate the risk of the option broker, say four to five times. Admittedly, it would be much easier to just hold the physical goods. An interesting possibility might be the option broker holding a margin amount from any customer who wishes to sell options, said amount determined by the size of the option position that the customer wants to take on. As far as delivery goes, it might be best to just position the entire operation at the most popular trade hub, Jinta. I am a new player and don't know where that is in game but I see players talking about it all the time. One other thing to throw into the conversation, what exactly would strike price be based on? For tritanium would it be a price that is regional? One solar system? The whole game?

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