CoinGlass Report:
Author: Mensh, ChainCatcher
On October 18th, the U.S. Securities and Exchange Commission (SEC) approved applications from the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE), allowing 11 approved Bitcoin ETF providers to engage in options trading. Currently, Bitcoin continues to rise, with its high surpassing $69,000.
ETF analyst Seyffart stated at the Permissionless conference that Bitcoin ETF options may be launched before the end of this year. However, there is no strict deadline from the Commodity Futures Trading Commission (CFTC) and the Options Clearing Corporation (OCC), so further delays are possible, and it is more likely to be launched in Q1 of 2025.
Meanwhile, the SEC has delayed the approval of Bitwise and Grayscale Ethereum ETF options, speculating that this is due to the lower-than-expected influx of funds after the approval of Ethereum ETFs. The SEC hopes to further investigate the impact of this proposal on market stability and will make a ruling on November 10th.
Bitcoin and Ethereum ETF inflows and outflows:
Why are Bitcoin ETF options important?
Bitcoin options are contracts that give holders the right, but not the obligation, to buy or sell Bitcoin at a predetermined price within a certain period of time. For institutional investors, these options provide a means to hedge price volatility or speculate on market trends without holding the underlying asset. These Bitcoin index options provide institutional investors and traders with a fast and cost-effective way to expand their exposure to Bitcoin, offering an alternative method to hedge their exposure to the world’s largest cryptocurrency.
Why is the approval of Bitcoin ETF options particularly important? Although there are already many cryptocurrency options products on the market, most of them lack regulation, which discourages institutional investors from participating due to compliance requirements. Additionally, there is currently a lack of options products that combine compliance and liquidity.
The most liquid options products are offered by Deribit, the world’s largest Bitcoin options exchange. Deribit supports 24/7/365 trading of Bitcoin and Ethereum options. The options are European-style and settled in the underlying cryptocurrency. However, due to being limited to cryptocurrencies, Deribit users cannot cross-margin their collateral with assets from traditional investment portfolios such as ETFs and stocks. It is also not legal in many countries, including the United States, without the endorsement of a clearing organization, making it difficult to address counterparty risk.
The Bitcoin futures options from the Chicago Mercantile Exchange (CME) and the Bitcoin options from LedgerX, a CFTC-regulated cryptocurrency options exchange, have significant bid-ask spreads. These options have limited functionality, such as LedgerX lacking a margin mechanism. Every call option on LedgerX must be sold in a covered manner (holding the underlying Bitcoin), and every put option must be sold in cash (holding the cash value of the strike price), resulting in higher trading costs.
Options related to Bitcoin assets, such as MicroStrategy options or BITO options, have significant tracking errors.
The significant increase in MicroStrategy’s stock price since the beginning of the year indirectly indicates the demand for Bitcoin hedging trades. Bitcoin ETF options can provide the market with options products that combine compliance and trading depth. Bloomberg researcher Jeff Park pointed out, “With Bitcoin options, investors can now engage in term-based portfolio allocation, especially for long-term investments.”
Enhancing or reducing volatility?
There is a debate about the impact of Bitcoin ETF options on Bitcoin volatility.
Those who believe it may enhance volatility argue that once options are listed, there will be many retail investors rushing into very short-term options, similar to the gamma squeeze seen in meme stocks like GME and AMC. Gamma squeeze refers to the situation where if accelerated volatility occurs, the trend will continue because investors buy these options, and their counterparties, large trading platforms and market makers, have to continuously hedge their positions by buying stocks, driving prices further up and creating more demand for call options.
However, with Bitcoin being limited to 21 million coins, it is absolutely scarce. If there is a gamma squeeze in Bitcoin, the only sellers will be those who already own Bitcoin and are willing to trade at a higher price in US dollars. Because everyone knows there won’t be more Bitcoin to push prices down, these sellers would also choose not to sell. The phenomenon of gamma squeeze has not been observed in listed options products, which may indicate that these concerns are unnecessary.
The concentration of options expirations can also cause short-term market volatility. Luuk Strijers, CEO of Deribit, stated that the open interest of Bitcoin options expiring at the end of September was the second largest in history, with approximately $58 billion in open interest on Deribit currently. He believes that this expiration may result in over $5.8 billion of options expiring worthless, which could trigger significant market volatility after expiration.
https://www.coinglass.com/options
Historically, options expirations have indeed affected market volatility. As the expiration date approaches, traders need to decide whether to exercise options, let them expire, or adjust their positions, which usually increases trading activity as traders try to hedge their bets or take advantage of potential price changes. In particular, if the price of Bitcoin is near the strike price at the expiration of options, option holders may exercise the options, which could create significant buying or selling pressure in the market. This pressure could lead to price fluctuations after the expiration of options.
On the other hand, those who believe volatility will be dampened take a longer-term perspective. This is because option prices reflect implied volatility, which is investors’ expectations of future volatility. The introduction of IBIT brings new liquidity and attracts more structured notes issuances, which may lead to a decrease in potential volatility because if implied volatility is too high, more options products will enter the market to flatten it.
A larger pool of liquidity attracts bigger fish
The introduction of options will further attract liquidity, and the convenience brought by liquidity will further attract liquidity, forming a positive feedback loop of liquidity. Currently, the consensus in the market is that the introduction of options has attractiveness to liquidity in terms of both itself and the additional consequences it brings.
As options market makers engage in dynamic hedging strategies, options create more liquidity for the underlying assets. The continuous buying and selling by options traders provide stable trading flows, smooth price fluctuations, and increase overall market liquidity, allowing larger pools of capital to enter the market while reducing slippage.
The approval of IBIT options may also attract more institutional investors, especially those managing large portfolios, as they often require complex tools to hedge their positions. This ability lowers perceived risk barriers, allowing more capital to flow into the market.
Many institutional investors manage large portfolios and have specific requirements for risk management, purchasing power, and leverage. Spot ETFs alone cannot solve these problems. Options can create very complex structured products, enabling more institutional capital to participate in Bitcoin.
With the approval of IBIT options, investors can invest in Bitcoin volatility, considering Bitcoin’s inherent volatility compared to other assets, which may bring substantial returns.
Bitcoin annualized realized volatility:
Eric Balchunas, an analyst at Bloomberg, pointed out that the approval of options is a major victory for Bitcoin ETFs as it brings deeper liquidity and attracts “bigger fish.”
At the same time, the approval of IBIT options is another clear statement from the regulators. Mike Novogratz, CEO of Galaxy Digital, stated in a CNBC interview, “Unlike traditional Bitcoin futures ETFs, these options allow trading within specific time intervals, which may generate more interest from funds due to Bitcoin’s inherent volatility. The approval of ETF options may attract more investors. The trading volume of MicroStrategy reflects strong demand for Bitcoin. Regulatory clarity may pave the way for the future growth of digital assets.”
For existing options markets, the approval of ETF options will also bring greater gains. Joshua Lim, co-founder of Arbelos Markets, speculated in the Unchained podcast that the liquidity of CME options will increase the most, as both markets cater to traditional investors, and the arbitrage opportunities formed will increase the liquidity of both markets.
Variant price performance
The introduction of options not only brings more diversified trading opportunities for investors but also accompanies previously unforeseen price performance.
For example, Joshua Lim found that many people were buying call options after the election, indicating that people were willing to make some kind of hedged bet, believing that the regulatory environment for cryptocurrencies would relax after the November 5th election. Typically, there may be some price volatility around the expiration date of these options, and this volatility is usually highly concentrated. If many people buy options with a $65,000 strike price for Bitcoin, typically, traders would buy when the price is below $65,000 to hedge their risks at that level and sell when the price is above this level, which would pin the Bitcoin price to the strike price.
If there is a certain trend, it usually delays the manifestation until after the expiration of options for various reasons. For example, options typically expire on the last Friday of the month, but this may not necessarily coincide with the end of the calendar month, which is particularly important as it marks the evaluation of hedge fund performance and the buying and selling of shares, creating capital inflows and purchasing pressure in this asset class. Due to all these dynamics, there can indeed be post-expiration volatility in the spot market, as perhaps much of the hedging activity by traders weakens after expiration.
Options do not trade on weekends, and if the gamma value of IBIT is very high at the close of the market on Friday, it may force traders to buy Bitcoin spot over the weekend to hedge their delta. There may be some risks in transferring Bitcoin between IBIT and spot markets. All these risks could eventually spread to the Bitcoin market, and wider bid-ask spreads may be seen.
Conclusion
For institutions, Bitcoin ETF options can greatly expand hedging tools, allowing for better risk control and return management, making diversified investment portfolios possible. For retail investors, Bitcoin ETF options provide a way to participate in Bitcoin volatility. The versatility of options may also trigger bullish sentiment in the market’s classical reflexivity, and liquidity brings more liquidity. However, whether options can effectively attract capital, have sufficient liquidity, and form a positive feedback loop that attracts capital still needs to be validated by the market.
