trading.md

Trading

• Write smth here every day

• Remilia?

  • Invest in meme
  • Utilization of twitter

• Money Markets?

  • Non-crypto trades?

Derivatives Reading

• derivative
  • Financial instrument, value of which derives from various underlying variables (ostensibly, price of some asset)

Futures

• forward contract

  • Agreement to buy / sell asset at future time $t$ for some price $p$
  • Value of holding dollars vs. dividend from stock to that point, expected price at $t$, etc.
    • one party is long
      • One party purchasing at $t$ (expect to make money)
    • one party is short
      • One party is sellling at future date for $p$
  • spot
    • Buy asset rn
  • payoffs
    • $S_T - K$ (long)
      • $K$ is price of unit asset in future
      • $S_T$ is price of unit asset at $T$
  • How does RFR come into play?
    • Can borrow anything, at $5%$ interest rate (RFR)
      • Can lend, and receive $5%$ interest
    • If gold is $300$$ (spot)
      • If I have gold
        • I can sell gold for 300, lend 300 dollars (gain $5%$ 15), and buy gold back after a year
        • I.e if long future is < 315 I make money
      • If I borrow 300
        • Buy gold, sell future
        • Expect 315 at least
        • i.e if long future is > 315 I make money

• futures contract

  • Exact delivery date is not specified (have a range instead)

• options

  • call option
    • Holder has right (contrast to futures / forward) to buy underlying at specified date for strike price
      • American - Excercised any time up to expiration
    • Holder in the hold price of option * units, until stock price is > strike price
  • put option
    • Holder has right to sell the underlying at specified date for specified price
      • European - holder can only exercise at maturity date
    • If strike price is greater than current price, borrow / buy stocks at spot, and sell for strike (walk w/ profit)
  • option positions
    • two sides buyer of option, seller of option
      • i.e long / short, call / put
        • long in call - Buyer of the call
        • Short in call - Seller of call - Has to deliver shares to long-holder of call contract
          • In the money as long as price of stock less than strike price + wiggle room (in for units + option contract price)
  • payoff
    • holder of long in call
      • $max(S_T - (K + C), 0)$ (per unit)
        • $S_T$ is price of stock at $T$
        • $K$ is strike
        • $C$ is contract price
    • holder of short in call
      • $min(K - S_T, 0) + C$
        • When strike is less than current stock price, will lose money (adjusted by sale price of the option)

• Pricing

  • short selling
    • Borrow asset, sell, wait for price to drop, buy back and take profit
  • Interest rate calculations
    • Suppose $10%$ annual
      • Can be broken into $10% / periods$ where after each period, the interest = $P * (1 + R / periods)$ is re-invested,
      • I.e $A(1 + R/m)^{m}$, as $m \rightarrow \infty$, $Ae^{R}$ is the continuously compounded interest
  • forward contract pricing
    • scenarios
      • $S_0$ (stock price rn) is $40$, RFR is $5%$ $F_0$ (forward price rn) is $43$ (forward contract overpriced)
        • Borrow 40, have to payback $40e^{0.5}$ at future expiry
        • Buy share, sell forward contract make $43 - 40e^{0.5}$
      • $S_0$ 40, RFR $5%$, $F_0$ 39 (forward contract underpriced)
        • Short share (borrow + sell rn) make 40 lend, and purchase 39 forward contract, make $40e^{0.05} - 39$
    • naive
      • Arbitrage exists unless $F_0 = S_0e^{rT}$ ($T$ is time to expiry of forward contract)
  • forward contract pricing (with dividends)

Large selling Event?

• How stable is US economy?
  • Seems like it may not be? Commercial housing market?

Perpetuals

• perpetual
  • Futures contract w/ no expiry
• maintenance-margin - Required amt. of collateral required to increase position size
• Accounts whose total value falls below maintenance margin have position closed by liquidation engine
  • liquidator can take up to entire balance of portfolio, positions purchased at liquidation price
• Users deposit collateral to act as buffer in price movements
  • Say I deposit $c$ as collateral, then I will safe in $c - margin_req$ price-movements in my position
• perpetual funding rate
  • funding rate
    • Payments made between holders of perpetual contracts.
    • Used to align spot-price w/ perpetual-price.
      • Perpetual has no expiry, how to ensure that the perpetual price is aligned w/ spot?
    • Directly dependent on spot / perp price
    • Depends on interest of underlying
      • i.e long = borrowing asset

Interest Rate Derivatives

Options

Greeks