Note: As of March 1, 2014 MPOE has been shuttered for the foreseeable future because they found all existing sources of price data unreliable. So information about bonds is currently only of historical value. S.MPOE stock continues unchanged except it will pay dividends only from MPEx operations.

Making a market in options requires a well-collateralized market maker. Interest-bearing MPOE bonds finance the operation of the market-making bot. Mircea Popescu personally acts as the backer of last resort, if the bot exhausts all capital provided by bonds.

Individuals can deposit an amount greater than 100 BTC with MPEx, and request an interest rate for the deposited funds via email, along with an address to which payments will be made. Funds so sent for deposit must be in an amount such that the last three digits are all 8 (ex: 100.000000888). These funds serve as the capital reserve for the options trading (MPOE) bot. Mircea Popescu must be notified of premium sought and payout address (email or IRC are good methods) before the transaction is submitted to the Bitcoin network.

In the end of every month after options expiration date, the bot operator calculates largest number of puts and calls that were outstanding at any point and pays interest on that “borrowed” capital (which means collateral backing sold puts/calls as explained in previous installment). The list of offers is sorted by premium (rate) and a number of offers selected such that the amount of capital borrowed equals the capital requirements of the bot for the past month. When the bot needs to borrow less than a full commitment to lend, it borrows and pays interest only on the actual borrowed funds.

Since the list is sorted by rate offered the last offer to be borrowed from will be at same or higher rate than those above it in the sorting. The highest-premium bond from which MPOE borrows in a given month sets the borrowing rate for that months entire bond list, similar to the US Treasury auctions.

Example: MPOE required 1500 BTC of collateral to operate during the previous month. MPEx received offers to lend in the amounts of A) 1000 BTC at 10%, B) 600 BTC at 7% and C) 500 BTC at 5%. Identify the amounts borrowed from each offer

Premium Ranking:

- C: offers 500BTC, requests 5% premium
- B: offers 600BTC for 7%
- A: offers 700BTC for 10%
- D: offers 100BTC for 11%

Amounts Borrowed:

- C: 500 BTC
- B: 600 BTC
- A: 400 BTC


- ∑: 1500 BTC

Next Month’s Premium: 10%. This is also called the MPBOR. MPBOR isn't actually used anywhere else, in the past it was basis for interest paid on MPEx bitcoin balances, which practice was discontinued.

Even though MPOE only borrowed 400 BTC from the 10% bond, it still pays 10% on all funds borrowed, total 150BTC. D's bond remains untouched and goes into next month with same premium, unless D requests otherwise.

From time to time the bot may suffer losses. Bondholder capital covers these losses. When a given deposit is reduced in this fashion below the 100 BTC minimum, the remaining capital is sent back to the address on file. There is also possibility that bondholders may request higher premium than there was MPOE profit. In this case the premium is paid out from bonds principal, too.

S.MPOE Shares

Buying stock in MPEx/MPOE entitles the purchaser *only* to a proportionate share in the profits of the Exchange and the Options Emporium, and bear no voting rights. S.MPOE profits are paid out proportionately to all shareholders through the Exchange’s dividend payment system. The profit from MPOE comes chiefly from following sources:

1. MPOE Options trading. Here bondholders are paid first and stock holders get only whatever profit was left. If MPOE suffers a loss, it's carried by bondholders only, as described above.

2. revenue from new accounts and trade fees on MPEx. This goes fully into MPOE dividends. There may be other revenue such as gracious donations to shareholders - if you round or make typo in your deposit amount. This also goes fully into MPOE dividends.

Expenses for buying option contracts, costs from option exercises and borrowing costs to collateralize the MPOE bot are carried by bondholders. Other overhead costs such as hosting and PR are carried by stockholders. There are 1 billion (1e9) shares, 500 million of which trade on MPEx (or eventually will when Mircea Popescu sells them - he discloses his holdings in monthly statements) and the other 500 million of which MP has contracted himself to never sell.

Reading S.MPOE Statements

S.MPOE statements are broken out into four sections: MPOE operational results, MPEx operational results, the bondholders table and the shareholders table.

MPOE Operational Results contains a summary of the bot’s activity for the past month. As a market maker it maintains a spread of bids and asks for all options listed on the exchange, and as a result typically both buys and sells contracts. Contracts purchased, exercises against the bot and interest paid on the capital borrowed to collateralize the bot constitute the Expenditures section, while contracts sold and exercised constitute the Revenue section.

MPEx Operational Results describes what fraction of the Exchange’s incomes and expenses are attributed to which activities. Revenues come from sales of accounts and trading fees, while expenses include PR and will in the future include hosting costs as well.

The Shareholders table is a simple tabulation of who owns what fraction of the MPEx float. Mircea Popescu’s stake is still in excess of 80%, so he collapses the list of all other shareholders into the ‘third parties’ entry.

The Bondholders Table shows the list of bonds (identified by bondholder payout address) from which MPOE borrowed over the past month in order to collateralize or meet a shortfall, the amount borrowed from each, losses (if applicable) and the calculated loss per Bitcoin loaned, and the rate at which MPOE will borrow during the successive month.

The accounting standard is elaborated on in MP's blog Accounting for the nonzero asset corporation.