CoinGlass reported:
On October 18th, the U.S. Securities and Exchange Commission 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 the 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 set by the CFTC and OCC, so further delays may occur, and it is more likely to be launched 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 Ethereum ETF was approved. The SEC hopes to further examine the impact of this proposal on market stability and will make a decision on November 10th.
Why are Bitcoin ETF options important? Bitcoin options are contracts that give holders the right to buy or sell Bitcoin at a predetermined price within a certain period of time, without any obligation. 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, 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 on the market, most of them lack regulation, which discourages institutional investors from participating due to compliance requirements. In addition, there is currently no compliant and liquid options product available 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 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 clearinghouse, which means the counterparty risk cannot be effectively addressed.
The Bitcoin futures options on the CME and the Bitcoin options on LedgerX, a CFTC-regulated cryptocurrency options exchange, have a large bid-ask spread. They have limited functionality, such as LedgerX not having a margin mechanism. Every call option on LedgerX must be sold for value (holding the underlying Bitcoin), and every put option must be sold for 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 a large tracking error.
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 pointed out, “With Bitcoin options, investors can now engage in term-based portfolio allocation, especially for long-term investments.”
Enhancing or reducing volatility?
The debate over the impact of Bitcoin ETF options on Bitcoin volatility is divided.
Those who believe it may enhance volatility argue that once options are listed, many retail investors will enter very short-term options, similar to gamma squeezes on meme stocks like GME and AMC. Gamma squeeze refers to the trend of continued volatility if investors buy these options, and their counterparties, large trading platforms and market makers, have to continuously hedge their positions by buying stocks, further driving up prices and creating more demand for call options.
However, since there are only 21 million Bitcoins, which are absolutely scarce, if there is a gamma squeeze, the only sellers will be those who already own Bitcoin and are willing to trade at a higher price in dollars. Because everyone knows that there will not be more Bitcoins to push down the price, these sellers will not choose to sell. The phenomenon of gamma squeeze has not appeared in listed options products, which may indicate that such concerns are unnecessary.
The concentration of options expiring can also cause short-term market volatility. Luuk Strijers, CEO of Deribit, stated that the expiring Bitcoin options contracts 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 expiring worthless, which could trigger significant market volatility after expiration.
Looking at history, options expiration does indeed affect 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 movements. In particular, if the price of Bitcoin is close to 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 options expiration.
On the other hand, those who believe that volatility will be dampened are taking a long-term perspective. This is because option prices reflect implied volatility, that is, investors’ expectations of future volatility. IBIT brings new liquidity, attracting more issuance of structured instruments, which may reduce potential volatility as more options products enter the market to flatten the implied volatility.
A larger fund pool attracts bigger players
The launch of options will further attract liquidity, and the convenience brought by liquidity will further attract liquidity, forming a positive cycle of liquidity. Currently, the market consensus is that the launch of options is attractive 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 fund pools 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 usually require complex 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 and have 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 can invest in Bitcoin volatility, considering that Bitcoin itself has higher volatility compared to other assets, which may bring substantial returns.
Bitcoin annual realized volatility:
According to Bloomberg analyst Eric Balchunas, the approval of options is a significant victory for Bitcoin ETFs, 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 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 of CME options will be most pronounced, as both markets face traditional investors, and the arbitrage opportunities that arise will increase the liquidity of both markets simultaneously.
Variations in price performance
The launch of options not only brings investors more diversified trading opportunities but also unexpected price performances.
For example, Joshua Lim found that many people were buying call options after the election, which means they were willing to make some kind of hedging bet, indicating that they believed the regulatory environment for cryptocurrencies would relax after the November 5th election. Typically, there will be some price fluctuations 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, usually, the market makers will buy when the price is below $65,000 to hedge their risk and sell when the price is higher, which will keep the Bitcoin price pinned to the strike price.
If there is a certain 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 performance evaluation and share trading of hedge funds, creating fund inflows and buying pressure. Due to all these dynamics, there is indeed volatility in the spot market after options expire, as many traders’ hedging activities may weaken 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 to IBIT because IBIT is cash-settled. All these risks may 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 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 capital still needs to be validated by the market.
