Author: Mensh, ChainCatcher
On October 18, the U.S. Securities and Exchange Commission approved the applications of the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE), which will allow 11 approved Bit coin ETF providers to engage in options trading. Currently, Bit coin continues to rise, with the high point exceeding $69,000.
ETF analyst Seyffart said at the Permissionless conference that Bit coin ETF options may be launched by the end of the year, but the CFTC and OCC do not have strict deadlines, so there may be further delays, more likely to be launched in Q1 2025.
Meanwhile, the SEC has postponed the approval of options for the Bit wise and Grayscale Ethereum ETFs, and the market speculates that this is due to the inflow of funds being less than expected after the Ethereum ETF is approved. The SEC hopes to further examine the impact of this proposal on market stability and will make a ruling on November 10.
Bit coin, Ethereum ETF inflows and outflows:
Why are Bit coin ETF options important?
Bit coin options are a type of contract that gives the holder the right, but not the obligation, to buy or sell Bit coin at a predetermined price within a certain time period. For institutional investors, these options provide a way to hedge price volatility or speculate on market trends without holding the underlying asset. These Bit coin index options provide institutional investors and traders with a fast and cost-effective way to expand their exposure to Bit coin, providing an alternative way to hedge their exposure to this global largest cryptocurrency.
Why is the approval of Bit coin ETF options particularly important? Although there are already a number of crypto options products on the market, many of them lack regulation, making institutional investors reluctant to participate due to compliance requirements. In addition, the market has not yet seen options products that combine compliance and liquidity.
The most liquid options products are offered by the world's largest Bit coin options exchange, Deribit. Deribit supports 24/7/365 trading of Bit coin and Ethereum options. The options are European-style and settled in physical underlying cryptocurrencies. But because they are limited to cryptocurrencies, Deribit users cannot cross-collateralize their margin with assets in traditional investment portfolios such as ETFs and stocks. And they are illegal in many countries, including the United States. Without the endorsement of a clearing house, the counterparty risk can never be well resolved.
The Bit coin futures options of the Chicago Mercantile Exchange and the Bit coin options of the CFTC-regulated crypto options exchange LedgerX have very wide bid-ask spreads. Their functionality is limited, such as LedgerX not having a margin mechanism. Each call option on LedgerX must be sold in kind (owning the underlying Bit coin), and each put option must be sold in cash (owning the cash value of the strike price), resulting in higher trading costs.
Options on Bit coin-related assets, such as MicroStrategy options or BITO options, have large tracking errors.
The sharp rise in MSTR's stock price since the beginning of the year also indirectly indicates the market's demand for Bit coin hedging transactions. What the Bit coin ETF options can bring to the market is an options product that combines compliance and trading depth. Bloomberg analyst Jeff Park pointed out: "With Bit coin options, investors can now do term-based portfolio allocation, especially for long-term investment."
Enhance or reduce volatility?
There is debate on whether the listing of Bit coin ETF options will increase or decrease the volatility of Bit coin.
Those who believe it may increase volatility argue that once the options are listed, there will be a lot of retail investors rushing into very short-term options, which could lead to a phenomenon similar to the gamma squeeze seen in meme stocks like GME and AMC. Gamma squeeze refers to the situation where if there is accelerated volatility, the trend will continue, because investors buy these options, and their counterparties, large trading platforms and market makers, have to constantly hedge their positions by buying stocks, driving prices up further and creating more demand for call options.
However, since there are only 21 million Bit coins. Bit coin is absolutely scarce, if a gamma squeeze occurs on IBIT, the only sellers will be those who already own Bit coin and are willing to trade it at a higher dollar price. Because everyone knows there will be no more Bit coin to drive down the price, these sellers will not choose to sell either. The options products that have been listed have not shown the phenomenon of gamma squeeze, perhaps indicating that this concern is unnecessary.
The concentration of option expirations may also cause short-term market volatility. Deribit CEO Luuk Strijers said that the open interest of Bit coin options expiring at the end of September was the second largest in history, and currently there are about $58 billion in open interest on Deribit. He believes that this expiration may result in over $5.8 billion in options expiring, which could lead to significant market volatility after expiration.
https://www.coinglass.com/options
Historically, option expirations have indeed affected market volatility. As the option expiration date approaches, traders need to decide whether to exercise the option, let it expire, or adjust their positions, which usually increases trading activity as traders try to hedge their bets or take advantage of potential price changes. Specifically, if the price of Bit coin is close to the strike price at the time of option expiration, the option holders may exercise the option, which could lead to significant buying and selling pressure in the market. This pressure could lead to price volatility after the options expire.
Those who believe that volatility will be dampened are more focused on the long-term perspective. Because the option price reflects the implied volatility, i.e. the investor's expectation of future volatility. IBIT will bring new liquidity, attracting more structured product issuance, which may lead to potential volatility reduction, because if the implied volatility is too high, more option products will enter the market to smooth it out.
A larger pool of capital attracts bigger fish
The launch of options will further attract liquidity, and the convenience brought by increased liquidity will further attract liquidity, forming a positive feedback loop of liquidity. The current market view has almost reached a consensus that the launch of options, whether from its own or the resulting consequences, has an attractive effect on liquidity.
As options market makers participate in dynamic hedging strategies, options will create more liquidity for the underlying asset. The continuous buying and selling of options traders provides a stable trading flow, smoothing price volatility and increasing the overall market liquidity, allowing a larger pool of capital to enter the market while reducing slippage.
The launch of IBIT options may also attract more institutional investors, especially those managing large investment portfolios, as they typically require sophisticated tools to hedge their positions. This capability lowers the perceived risk barrier, allowing 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. The spot ETF alone cannot solve the problem. Options can create very complex structured products, allowing more institutional capital to participate in Bit coin.
With the approval of IBIT options, investors can invest in the volatility of Bit coin, considering that Bit coin itself has higher volatility than other assets, which may bring significant returns.
Bit coin annual realized volatility:
Bloomberg analyst Eric Balchunas pointed out that the approval of options is a major victory for the Bit coin ETF, as it will bring deeper liquidity and attract "bigger fish".
At the same time, the approval of IBIT options is another clear statement from the regulatory side. In a CNBC interview, Galaxy Digital CEO Mike Novogratz said that "unlike traditional Bit coin futures ETFs, these options allow trading at specific time intervals, which may generate more interest due to Bit coin's inherent volatility. The approval of ETF options may attract more investors. MicroStrategy's trading volume reflects strong demand for Bit coin. The clarity of regulation may pave the way for the future growth of digital assets."
For the existing options market, the approval of ETF options will also bring greater benefits. In a podcast on Unchained, Joshua Lim, co-founder of Arbelos Markets, speculated that the liquidity growth of CME options will be the most obvious, as they both face traditional investors, and the resulting arbitrage opportunities will increase the liquidity of both markets.
Variation in Price Performance
The introduction of options not only brings more diversified operating space for investors, but also brings unexpected price performance that was not previously anticipated.
For example, Joshua Lim found in his trading that many people are buying call options after the election, which means that people are willing to make a kind of hedging bet, that is, they believe that the regulatory environment for cryptocurrencies will be relaxed after the election on November 5. Usually there will be some price fluctuations around the expiration date of these options, and this kind of fluctuation is usually highly concentrated. If many people buy options with a strike price of $65,000 for Bit, due to the hedging of traders at this position, traders usually buy when the price is below $65,000, and then sell when the price is above this price, the Bit price will be pinned at the strike price.
If there is a certain trend, it usually appears after the expiration of the option, 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, and the calendar month is particularly important because it marks the performance evaluation and share trading of hedge funds, which will create inflows of funds into this asset class and buying pressure. Due to all these dynamics, the spot market will indeed fluctuate after the expiration of the option, because perhaps the hedging activities of many traders will be weakened after the expiration.
Options are not traded on weekends, and the very high IBIT gamma value at the market close on Friday may force traders to have to buy Bit spot on the weekend to hedge their delta. Since IBIT is cash-settled, there may be some risks in transferring Bit between IBIT. All these risks may eventually spread to the Bit market. We may see the bid-ask spread widen.
Conclusion
For institutions, Bit ETF options can greatly expand hedging means, more accurately control risks and returns, and make more diversified portfolios possible. For retail investors, Bit ETF options are a way to participate in the volatility of Bit. The multi-functionality of options may also trigger a 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 of attracting funds still needs to be verified by the market.
