Well, one extension to escrow is that the platform – say tcgplayer, might as well sell you a future to hedge ur short call. If u get exercised, then they can deliver straight from their shop which has a large card pool anyway and a standardized grading system and insured delivery.

Yeah, it is essentially escrow in that your optioned cards are encumbered for the duration of the option. It consolidates your counterparty risk onto TCGP or whoever is running the platform, and the fees end up being a trust tax. The additional benefit is that it precludes leveraged trades which mitigates potential volatility.

This system might actually work. Essentially, you’d have a third party hold optioned cards in “escrow” during the option period, facilitating trust between arms-length parties. They’d take a small fee, but their only investment would be storage and administration.

Dan,

Thanks for your perspective. I don’t think anyone in this MTG Finance business is interested in going to court over their option trades, but it’s good to hear there is enforceability at least in the highest sense.

In regards to my specific contract, Adrian will have to trust me completely that I’ll deliver (I have no motivation to damage my reputation here). But in the future, perhaps limiting these things to within country is best.

Todd,

Thanks for your perspective. You have clearly thought about this concept some in the past! I’m not sure if TCG Player or any other platform would be willing to take this sort of endeavor on, but I would certainly be thrilled if it were to gain traction. To your point, being able to bet against a card hasn’t been possible before outside of friendly wagers, but it could be a way to temper volatility. When cards spike, people can only buy out cheap copies and try to sell into the hype. But if people could do options, they’d be able to bet against such a spike and there’d be no shipping involved!

Not sure if we have the power to make this happen, but I’m excited to hear others would be interested! Thanks for commenting!

I think this sort of platform allowing strictly covered derivatives would be beneficial and actually reduce price volatility. Spikes are frequently caused due to shipping time, so removing that barrier will smooth out the price action in many cases. Also the ability to take the other side of a bet introduces negative feedback further smoothing it out.

The fact that the news has been full of the effects of massive UNcovered derivatives for the past decades has created a legitimate fear, but I think the risks be safely mitigated.

An option contract is not a secured transaction. Securities law is not applicable in this context. This is a simple contract for the sale of goods, and UCC Article 2 controls. The contract described is legally enforceable.

This contract is perfectly legal, and represents Sig’s irrevocable offer to sell at the specified price for the duration of the option period.

That said, this contract does have an enforceability problem. Let’s assume that the holder exercises the option, but Sig breaches by refusing to tender the cards at the agreed-upon price. The option holder can sue for money damages. In theory, this is an easy win for the non-breaching party.

However, the fact that one party is domiciled in Australia complicates things. It would be most convenient for the option holder to ask the Australian courts to enforce the contract. But an Australian court would have no jurisdiction over Sig (who does not live in Australia, afaik).

The option holder should probably assign (sell) the option to an individual who lives in the same country as Sig. This way she is not left with a contract that is so difficult to enforce.

I suppose I could, but it would mean greater risk. Selling a naked call (uncovered) means that if Adrian exercises his option I need to go buy those 91 Shocks and ship them to him. If I sell mine and they suddenly spike and I have to re-buy this could mean significant losses. Shipping, fees, time all should be factored in, and likely results in the need for a major drop in price for this to be justified. One example where this is the right choice could be an announcement of Shock Lands in Khans of Tarkir – of course there’s a 0.00001% chance of this, but it makes the point.

If you see signs they are going to drop really hard you could sell them and rebuy if/when Adrian wants to buy (or whenever you feel they are at their lowest).

Assuming you can obtain them again in a small enough time frame this should work, right?

Great questions! I would say my overall view on Shock Lands in the next 6 months is “Neutral”. I expect them to drop no more than 10-20% and rise no more than 10-20%. Basically I don’t see enough value in selling all 91 Shocks to rebuy them again in less than a year. There’s no point. But the opportunity cost of making such minimal gains was too steep for me to accept at face value.

I did shackle myself to the position by selling this covered call. If shocks tank, I’m left holding the bag. That’s the risk I am taking, and it’s the benefit Adrian P. gets by buying the option. But I’m ok with holding because I think the LONG TERM view is positive enough. That’s the rationale.

Likewise, if they spike then Adrian wins big time. I think the likelihood of this is low enough though…certainly in the coming couple months.

You propose some very realistic options, Shoey. I think one’s “premium” for contracts could vary in price depending on their feedback ratings! So if someone is brand new and starting out, they can only get a small fraction of the overall potential for selling a covered call. But once feedback is accrued, the fraction gradually approaches 1, which would be the market rate for such contracts.

MTGO could work even better for this, I agree! If this feature were available in MTGO I would be much more tempted to try it out :).

Glad you’ve enjoyed this content. I am a very active stock market trader, and there are so many parallels I see between MTG Finance and Wall Street. That’s what drives my interest, and I try to incorporate some of my Wall St. learning into these QS articles…at the hopes that I don’t bore others to death for the technical rigor involved!

This was a response to B. Roome above regarding his 25 shock land exposure. These comments are getting lengthy…I like it!

Yes, I like your reasoning. The potential upside is decent enough to merit a hold. Selling would only be advisable if SCG stops doing Modern all of a sudden and/or you need the cash urgently. If you can wait a year, these should turn around a little. Just don’t expect 50%+ gains in that timeframe.

In that sense, if you have better investment opportunities I couldn’t fault you to move funds into those and away from Shock Lands as well. It really is a tough call….hence my hedging play!

My knowledge of derivatives is quite basic, but I plugged your numbers into DerivGem as an American at-the-money and got an implied vol of 22%/year. So I’d dare say if the volatility of shocklands is lower than that you scored a good deal in theory. 🙂

With respect to other comments who raise the concern about scams. Your trade is essentially an Over The Counter deal as opposed to Exchange Traded – these are commonplace and essentially the risk of scam is counterparty credit risk. The way it could be mitigated is in the pricing. If I lend $100 to ten people and know generally that the probability of default in the population I’m lending to is 1-in-10, then even if interest rates were zero, I would have to charge the ten people 11.1% each. Maybe in the future there could be an ebay style market where option sellers are rated and a new seller would have to cop lower premiums until they build up a rating. As RyeAbc said MTGO could facilitate this even more easily – a reputable bot essentially makes this an Exchange and they could hold on to an initial margin in tix or the cards themselves as collateral.

I returned to play MTG after a 15 year hiatus and find this finance aspect is really intriguing. It’s its own game within the game – as you guys on QS have said, the whole thing is like a model of stockmarket (maybe more like commodities market?). The price relationships between draft supply/tournament seasons/mtgo redemption is a real eye opener & I really enjoy reading this!

So is your stance that shocks will go up or down before the end of the option?

What happens if they drop drastically? Didn’t you just shackle yourself to selling low and opened yourself up to getting bought out if they spike?

Just trying to understand the reason behind it all and why you decided to go this route.

If a reputable bot/company acted as the middle man holding the cards they could potentially make it work and make tons of money as well charging some percentage to be the middle man. IF they pick up and run with everyone’s product then that’s a lawsuit I’d imagine would go through so it would be a much more safe environment to do something like this.

Yep, and when these sellers get the 10 negative feedback ratings for their shadiness, it’s well-hidden amongst the 1000’s of positive feedback. This is because 99.9% of card prices drop once they release! It’s unregulated just like MTG options!

Byron,

No offense taken. MTG Options is definitely not for eBay. I suspect a whole new platform would be necessary to keep track and regulate MTG options. Honestly, it’s not likely something that will happen (at least not successfully) in the near future.

Maybe one day….

Yeah, Pi’s pre-sale comparison is actually interesting. It makes the concept of options less intimidating because in a way, preordering is very similar. The big difference is that the “contract” must be executed once the new set comes out. But essentially you’re agreeing to pay for the pre-ordered cards at a set price knowing that market fluctuations may move the market price before you get your order!