Author: Mensh, ChainCatcher
Editor: Nianqing, 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 Bitcoin ETF providers to conduct options trading. Currently, Bitcoin continues to rise, and the high point has exceeded $69,000.
ETF analyst Seyffart said at the Permissionless conference that Bitcoin ETF options may be launched before the end of the year, but the CFTC and OCC do not have strict deadlines, so it may be further delayed and more likely to be launched in Q1 2025.
At the same time, the SEC postponed the approval of Bitwise and Grayscale Ethereum ETF options. The market speculated that this was because the amount of funds flowing into the Ethereum ETF after its approval was less than expected. The SEC hopes to further investigate the impact of this proposal on market stability and will make a ruling on November 10.
Bitcoin and Ethereum ETF inflows and outflows:
Why are Bitcoin ETF options important?
Bitcoin options are contracts that give the holder the right, but not the obligation, to buy or sell Bitcoin at a predetermined price within a certain time frame. For institutional investors, these options offer a means of hedging against price volatility or speculating on market movements without having to own the underlying asset. These Bitcoin index options offer institutional investors and traders a quick and cost-effective way to expand their exposure to Bitcoin, providing an alternative way to hedge their exposure to the world's largest cryptocurrency.
Why is the passage of Bitcoin ETF options so important? Although there are many crypto options products on the market, most of them lack supervision, making institutional investors reluctant to participate due to compliance requirements. In addition, there are no options products that are both compliant and liquid in the market.
The most liquid options product is launched by Deribit, the world's largest Bitcoin options exchange. Deribit supports 24/7/365 trading of Bitcoin and Ethereum options. Options are European-style and settled in physical underlying cryptocurrencies. However, due to the limited use of cryptocurrencies, Deribit users cannot cross margin with assets in traditional portfolios such as ETFs and stocks. And it is not legal in many countries, including the United States. Without the endorsement of a clearing house, counterparty risk cannot be properly resolved.
The bid-ask spreads of CME’s Bitcoin futures options and LedgerX’s Bitcoin options, a crypto options exchange regulated by the CFTC, are very large. The functions are limited, for example, LedgerX does not have a margin mechanism. Each call option on LedgerX must be sold in a price form (owning the underlying Bitcoin), and each put option must be sold in cash (owning the cash value of the strike price), resulting in high transaction costs.
Options on Bitcoin-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 shows that there is a market demand for Bitcoin hedging transactions. Bitcoin ETF options can provide the market with options products that are both compliant and have trading depth. Bloomberg researcher Jeff Park pointed out: "With Bitcoin options, investors can now make portfolio allocations based on duration, especially long-term investments."
Increase or decrease volatility?
Both sides of the debate have different opinions on what impact the listing of Bitcoin ETF options will have on Bitcoin volatility.
Those who believe that volatility may increase believe that once options are listed, there will be a lot of retail investors rushing into very short-term options, and a gamma squeeze similar to what happened on meme stocks such as GME and AMC will occur. Gamma squeeze refers to the trend that will continue if there is accelerated volatility because investors buy these options and their counterparties, large trading platforms and market makers, must constantly hedge their positions and buy stocks, pushing prices further up and creating more demand for call options.
But since there are only 21 million Bitcoins, Bitcoin is absolutely scarce. If a gamma squeeze occurs in IBIT, the only sellers will be those who already own Bitcoin and are willing to trade at a higher USD price. Because everyone knows that there will not be more Bitcoins to drive down the price, these sellers will not choose to sell. The listed options products have not experienced gamma squeezes, which may indicate that this concern is unnecessary.
The concentrated expiration of options will also cause market volatility in the short term. Deribit CEO Luuk Strijers said that the open interest of Bitcoin options expiring at the end of September is the second largest in history, and there are currently about $58 billion in open interest on Deribit. He believes that more than $5.8 billion in options may expire this time, which may cause significant market volatility after expiration.
https://www.coinglass.com/options
Historically, option expiration does affect market volatility. As option expiration approaches, traders need to decide whether to exercise their options, let them lapse, or adjust their positions, which often 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 close to the strike price at option expiration, option holders may exercise their options, which may lead to greater buying and selling pressure in the market. This pressure may trigger price volatility after the option expires.
Those who believe that volatility will be flattened are more focused on the long-term perspective. This is because option prices reflect implied volatility, which is investors' expectations of future volatility. IBIT brings new liquidity and attracts more issuance of structured notes, which may lead to a reduction in potential volatility, because if implied volatility is too high, more option products will enter the market to flatten it.
Bigger pools attract bigger fish
The launch of options will further attract liquidity, and the trading convenience brought by liquidity will further attract liquidity, thus forming a positive cycle of liquidity. At present, the market has almost reached a consensus that the launch of options has an attractive effect on liquidity both in itself and in terms of the additional consequences it brings.
As option market makers engage in dynamic hedging strategies, options create more liquidity for the underlying asset. This continuous buying and selling by option traders provides a steady flow of trades, smoothing price fluctuations and increasing the overall liquidity of the market, 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 portfolios, as they often require complex tools to hedge their positions. This capability lowers the perceived risk barrier and allows more capital to flow into the market.
Many institutional investors manage large portfolios and have very specific requirements for risk management, purchasing power, and leverage. Spot ETFs alone cannot solve the problem. Options can create very complex structured products, allowing more institutional capital to participate in Bitcoin.
With the approval of IBIT options, investors are able to invest in the volatility of Bitcoin, which could result in significant returns considering Bitcoin's own higher volatility than other assets.
Bitcoin annual realized volatility:
Bloomberg analyst Eric Balchunas noted that the passage of options is a major victory for the Bitcoin ETF because 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. Mike Novogratz, CEO of Galaxy Digital, said in an interview with CNBC that "Unlike traditional Bitcoin futures ETFs, these options allow trading at specific time intervals, which may trigger more interest from funds due to the inherent volatility of Bitcoin. The approval of ETF options may attract more investors. MicroStrategy's trading volume reflects the 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. In the Unchained podcast, Joshua Lim, co-founder of Arbelos Markets, speculated that the liquidity growth of CME options will be the most obvious, because both face traditional investors, and the arbitrage opportunities formed will increase the liquidity of both markets at the same time.
Variable price performance
The introduction of options not only provides investors with more diversified operating space, but is also accompanied by previously unexpected price performances.
For example, when Joshua Lim was trading, he found that many people were buying post-election call options, which means that people are willing to make some kind of hedge bet that the regulatory environment for cryptocurrencies will be relaxed after the November 5 election. There are usually some price fluctuations around the expiration date of these options, and such fluctuations are usually highly concentrated. If many people buy Bitcoin options with a strike price of $65,000, since traders hedge their risks at this position, usually traders will buy when the price is below $65,000 and then sell when the price is above this price, and the Bitcoin price will be nailed to the strike price.
If there is a trend, it is usually delayed until after the options expire for a number of 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 performance evaluation of hedge funds and the buying and selling of shares, which will create inflows and buying pressure into the asset class. Due to all these dynamics, the spot market does have volatility after option expiration, because perhaps a lot of dealer hedging activity before expiration has weakened after expiration.
Options are not traded on weekends, and a very high IBIT gamma at the market close on Friday may force traders to buy spot Bitcoin over the weekend to hedge their deltas. Since IBIT is a cash redemption, there may be some risk in transferring Bitcoin between IBITs. All of these risks may eventually spread to the Bitcoin market. We may see a widening of the bid-ask spread.
in conclusion
For institutions, Bitcoin ETF options can greatly expand hedging means, more accurately control risks and returns, and make more diversified investment portfolios possible. For retail investors, Bitcoin ETF options are 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 cycle of attracting funds still needs to be verified by the market.
