News Article:
Author: Mensh, ChainCatcher
On October 18th, the U.S. Securities and Exchange Commission (SEC) approved the applications of 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 price surpassing $69,000.
ETF analyst Seyffart stated at the Permissionless conference that Bitcoin ETF options may be launched before the end of the year, but there is no strict deadline from the Commodity Futures Trading Commission (CFTC) and the Options Clearing Corporation (OCC), so there may be further delays, potentially launching in Q1 2025.
Meanwhile, the SEC has postponed 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 the Ethereum ETF. 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 inflow and outflow volumes:
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. For institutional investors, these options provide a means to hedge price volatility or speculate on market trends without holding the underlying assets. These Bitcoin index options offer institutional investors and traders a fast and cost-effective way to expand their exposure to Bitcoin, providing 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 in the market, most of them lack regulation, which discourages institutional investors from participating due to compliance requirements. Additionally, there is currently a lack of compliant and liquid options products in the market.
The most liquid options product is 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 cryptocurrencies. However, due to being limited to cryptocurrencies only, Deribit users cannot cross-margin their collateral with assets from traditional investment portfolios such as ETFs and stocks. Furthermore, it is not legal in many countries, including the United States, without the endorsement of a clearinghouse, which prevents the effective mitigation of counterparty risk.
The Bitcoin futures options from CME Group and the Bitcoin options from LedgerX, a CFTC-regulated cryptocurrency options exchange, have significant bid-ask spreads. Their functionality is limited, for example, LedgerX does not have a margin mechanism. Each call option on LedgerX must be sold for value (owning the underlying Bitcoin), and each put option must be sold for cash (owning the cash value of the strike price), resulting in higher transaction costs.
Options related to Bitcoin assets, such as MicroStrategy options or BITO options, have significant tracking errors.
The surge 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 points out, “With Bitcoin options, investors can now engage in time-based investment portfolio allocations, especially for long-term investments.”
Enhancing or reducing volatility?
There are differing opinions on how the listing of Bitcoin ETF options will impact Bitcoin volatility.
Those who believe it may enhance volatility argue that once options are listed, many retail investors will enter very short-term options, similar to the gamma squeeze seen in meme stocks like GME and AMC. Gamma squeeze refers to the continuation of a trend if there is accelerated volatility because investors purchase these options, and their counterparties, large trading platforms and market makers, must continually hedge their positions by buying stocks, driving prices further up and creating more demand for call options.
However, since there are only 21 million Bitcoins in existence and Bitcoin 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 Bitcoins to push prices down, these sellers also won’t choose to sell. The absence of a gamma squeeze in existing options products may suggest that these concerns are unnecessary.
The concentration of options expirations can also cause market volatility in the short term. Luuk Strijers, CEO of Deribit, stated that the Bitcoin options expiring at the end of September were the second largest in history, with approximately $58 billion in open interest on Deribit. He believes that this expiration may result in over $5.8 billion of options becoming worthless, which could trigger significant market volatility after the 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 typically increases trading activity as traders attempt to hedge their bets or take advantage of potential price movements. In particular, if the price of Bitcoin is close to the strike price at the expiration of options, option holders may exercise their options, which can create significant buying or selling pressure in the market. This pressure can lead to price fluctuations after options expiration.
On the other hand, those who believe that volatility will be tamed take a longer-term perspective. This is because option prices reflect implied volatility, i.e., investors’ expectations of future volatility. The introduction of IBIT brings new liquidity and attracts more issuance of structured products, which could potentially lower volatility as more options products enter the market to flatten it.
A larger pool of funds attracts larger fish
The launch of options will further attract liquidity, and the convenience brought by liquidity will further attract liquidity, creating a positive feedback loop of liquidity. Currently, the market consensus is that the launch of options is attractive to liquidity, both in terms of itself and the additional consequences it brings.
With options market makers participating in dynamic hedging strategies, options create more liquidity for the underlying asset. The continuous buying and selling by options traders provide stable trading flows, smooth out price fluctuations, and increase overall market liquidity, allowing for larger pools of funds to enter the market while reducing slippage.
The approval of IBIT options may also attract more institutional investors, especially those managing large portfolios who typically require sophisticated tools to hedge their positions. This ability lowers perceived risk barriers and allows more capital to flow into the market.
Many institutional investors manage large investment portfolios with specific requirements for risk management, purchasing power, and leverage. Spot-based ETFs alone cannot solve these problems. Options can create very complex structured products, allowing more institutional capital to participate in Bitcoin.
With the approval of IBIT options, investors can invest in Bitcoin volatility, considering the higher volatility of Bitcoin compared to other assets, which may bring substantial returns.
Bitcoin annual 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.”
Furthermore, the approval of IBIT options is another clear statement from regulators. Mike Novogratz, CEO of Galaxy Digital, stated in an interview with CNBC, “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 growth in CME options will be most evident as both face traditional investors, and the arbitrage opportunities created in both markets will increase liquidity.
Variations in price performance
The launch of options not only provides investors with more diversified trading opportunities but also brings about unexpected price performances.
For example, Joshua Lim discovered during trading that many people were buying call options after the election, indicating that people were willing to make some kind of hedge bet, believing that the regulatory environment for cryptocurrencies would relax after the November 5th election. There is usually some price volatility near 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, market makers will buy when the price is below $65,000 to hedge their risks and sell when the price is above this price, pinning the Bitcoin price to the strike price.
If there is a certain trend, it usually manifests itself after the expiration of options, for various reasons. For example, options usually expire on the last Friday of the month, but this does not necessarily coincide with the end of the calendar month, which is particularly important because it marks the evaluation of hedge funds’ performance and the buying and selling of shares, which will create inflows of funds and buying pressure in that asset class. Due to all these dynamics, there can indeed be volatility in the spot market after options expiration, as perhaps many market makers’ hedging activities weaken after expiration.
Options do not trade over the weekend, and if the gamma value of IBIT is very high at Friday’s market close, it may force market makers to buy Bitcoin spot over the weekend to hedge their deltas. There may be some risk involved in transferring Bitcoin to IBIT as it is cash-settled. All these risks could eventually spread to the Bitcoin market, and wider bid-ask spreads may be observed.
Conclusion
For institutions, Bitcoin ETF options can greatly expand hedging capabilities, allowing for more precise risk and return control, and enabling more diversified investment portfolios. For retail investors, Bitcoin ETF options provide a way to participate in Bitcoin volatility. The multifunctionality of options may also trigger bullish sentiment in the market’s classic reflexivity, and liquidity brings more liquidity. However, whether options can effectively attract funds, have sufficient liquidity, and form a positive feedback loop that attracts funds still needs validation from the market.
