CoinGlass.com Report:
The approval of options is a major victory for Bitcoin ETFs as it will bring deeper liquidity and attract larger players.
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 the 11 approved Bitcoin ETF providers to trade options.
ETF analyst Seyffart stated at the Permissionless conference that Bitcoin ETF options may be launched before the end of the year, but the Commodity Futures Trading Commission (CFTC) and the Options Clearing Corporation (OCC) do not have strict deadlines, so there may be further delays and it is more likely to be launched in Q1 2025.
At the same time, the SEC postponed the approval of Bitwise and Grayscale Ethereum ETF options, and the market speculates that this is due to the lower-than-expected inflow of funds after the approval of Ethereum ETFs. The SEC wants to further investigate the impact of this proposal on market stability and will make a decision 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 fluctuations or speculate on market trends without holding the underlying assets.
These Bitcoin index options provide institutional investors and traders with a fast and cost-effective way to increase their exposure to Bitcoin, offering an alternative method to hedge their positions in 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, making institutional investors reluctant to participate due to compliance requirements. In addition, there are currently no options products that are both compliant and liquid in the market.
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 cryptocurrencies.
However, due to being limited to cryptocurrencies, Deribit users cannot cross-margin their collateral with 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 clearinghouse, counterparty risk cannot be effectively addressed.
The Bitcoin futures options on the Chicago Mercantile Exchange (CME) and the Bitcoin options on LedgerX, a CFTC-regulated cryptocurrency options exchange, have very large bid-ask spreads. They have limited functionalities, such as LedgerX not having a margin mechanism. Each call option on LedgerX must be sold in a fungible form (owning the underlying Bitcoin), and each put option must be sold in a cash form (owning 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 surge in the stock price of MicroStrategy since the beginning of the year indirectly indicates the demand for Bitcoin hedging trades. Bitcoin ETF options can provide the market with compliant and deep options products. Bloomberg researcher Jeff Park pointed out, “With Bitcoin options, investors can now make time-based portfolio allocations, especially for long-term investments.”
Enhancing or reducing volatility?
The impact of the listing of Bitcoin ETF options on Bitcoin volatility is a subject of debate, with arguments on both sides.
Those who believe that it may enhance volatility argue that once options are listed, there will be many retail investors entering very short-term options, similar to the gamma squeeze seen in meme stocks like GME and AMC. Gamma squeeze refers to the tendency for trends to continue if there is an accelerated volatility as investors buy these options and their counterparties, large trading platforms and market makers, have to continuously hedge their positions by buying stocks, pushing prices higher and creating more demand for call options.
However, since there are only 21 million Bitcoins, Bitcoin is inherently scarce, and if there is a gamma squeeze on IBIT, the only sellers will be those who already own Bitcoin and are willing to trade at higher US dollar prices. Because everyone knows that there will be no more Bitcoins to push down the price, these sellers will not choose to sell. There has been no gamma squeeze in listed options products, which may suggest that these concerns are unfounded.
The concentration of options expiring can also cause short-term market fluctuations. Luuk Strijers, CEO of Deribit, said that the expiring Bitcoin options contracts at the end of September were the second largest in history, with approximately $58 billion of open interest currently on Deribit. 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 their 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 movements. In particular, if the price of Bitcoin is near the strike price at the expiration of the options, option holders may exercise their options, which can lead to significant buying and selling pressure in the market. This pressure can cause price fluctuations after the options expire.
On the other hand, those who believe that volatility will be dampened take a longer-term perspective. This is because option prices reflect implied volatility, which is investors’ expectations of future volatility. IBIT brings new liquidity and attracts more structured products, which could potentially lower volatility as more options products enter the market to flatten it if implied volatility is too high.
A larger pool of funds attracts larger players
The introduction of options will further attract liquidity, and the convenience of trading brought by liquidity will further attract liquidity, forming a positive feedback loop of liquidity. The current market consensus is almost unanimous that the introduction of options is attractive to liquidity in terms of itself and its additional consequences.
Options create more liquidity for the underlying assets as market makers participate in dynamic hedging strategies. The continuous buying and selling by options traders provides stable trading flows, smoothes price fluctuations, and increases overall market liquidity, allowing larger pools of funds to enter the market and reducing slippage.
The approval of IBIT options may also attract more institutional investors, especially those managing large portfolios, as they usually require sophisticated tools to hedge their positions. This ability reduces perceived barriers to risk and allows more capital to flow into the market.
Many institutional investors manage large investment portfolios and have very specific requirements for risk management, purchasing power, and leverage. Just relying on spot ETFs cannot solve the problem. Options can create highly complex structured products, allowing more institutional capital to participate in Bitcoin.
With the approval of IBIT options, investors can now invest in Bitcoin volatility, considering the high volatility of Bitcoin itself, 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 will bring deeper liquidity and attract “larger players”.
At the same time, the approval of IBIT options is another clear statement from regulators. Mike Novogratz, CEO of Galaxy Digital, stated in an interview with CNBC that “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 a 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 on the Unchained Podcast that the liquidity growth of CME options will be most pronounced, as both markets face traditional investors, and the arbitrage opportunities created in the process will increase the liquidity of both markets.
Variations in price performance
The introduction of options not only brings more diverse trading opportunities for investors but also unexpected price performance.
For example, Joshua Lim found that many people were buying call options after the election, which means that people are willing to make some sort of hedge bet, believing that the regulatory environment for cryptocurrencies will ease after November 5th. There is usually some price volatility around the expiration date of these options, and this volatility is usually highly concentrated. If many people buy options with a strike price of $65,000 for Bitcoin, typically, traders will buy when the price is below $65,000 to hedge their risks and sell when the price is above this price, anchoring the Bitcoin price to the strike price.
If there is a trend, it usually delays its manifestation until after the options expire, and there are many reasons for this. 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 assessment of hedge fund performance and share trading, which will create inflows of funds and buying pressure. Due to all these dynamics, there is indeed volatility in the spot market after options expire, as perhaps many traders’ hedging activities weaken after expiration.
Options do not trade on weekends, and if the gamma value of IBIT is very high at Friday’s market close, 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 because IBIT is cash-settled. All these risks may eventually spread to the Bitcoin market, and we may see wider bid-ask spreads.
Conclusion
For institutions, Bitcoin ETF options significantly expand hedging capabilities and allow for more precise risk and return control, 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 classic reflexivity of the market, and liquidity brings more liquidity. However, whether options can effectively attract funds, have sufficient liquidity, and form a positive feedback loop to attract funds still needs to be validated by the market.
