Coin Glass News Report:
The approval of options is a major victory for Bitcoin ETFs as it will bring deeper liquidity and attract larger players.
On October 18, the U.S. Securities and Exchange Commission approved applications from the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE), allowing the 11 approved Bitcoin ETF providers to engage in options trading.
ETF analyst Seyffart stated 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 further delays are possible, and it is more likely they will be launched in Q1 2025.
Meanwhile, the SEC has postponed the approval of Bitwise and Grayscale Ethereum ETF options, as the influx of funds after the Ethereum ETF approval was lower than expected. The SEC wants to further investigate the impact of this proposal on market stability and will make a ruling on November 10.
Bitcoin and Ethereum ETF inflow/outflow volume:
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. These options provide institutional investors with a means to hedge price volatility or speculate on market trends without owning the underlying asset.
These Bitcoin index options provide institutional investors and traders with a fast and cost-effective way to increase their exposure to Bitcoin and offer an alternative method to hedge their positions in the world’s largest cryptocurrency.
Why is the approval of Bitcoin ETF options particularly important? While there are already many cryptocurrency options products on the market, most of them lack regulation, making institutional investors unwilling to participate due to compliance requirements. In addition, there is currently no options product that combines compliance and liquidity.
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 settle in the underlying cryptocurrency.
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. Additionally, it is not legal in many countries, including the United States. Without endorsement from a clearing organization, counterparty risk cannot be effectively resolved.
The price spread for Bitcoin futures options on the CME and the Bitcoin options on LedgerX, a CFTC-regulated cryptocurrency options exchange, is very large. These options have limited functionality, such as LedgerX not having a margin mechanism. Each call option on LedgerX must be sold in cash (holding 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 sharp rise in the price of MSTR stock 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 are both compliant and deep in 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?
There is debate on how the listing of Bitcoin ETF options will affect 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 a situation where if there is an acceleration of volatility, the trend will continue because investors buy these options, and their counterparties, large trading platforms and market makers, have to continuously hedge their positions by buying stocks, driving prices up further 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 in IBIT, the only sellers will be those who already own Bitcoin and are willing to trade at a higher price in dollars. Because everyone knows there will be no more Bitcoins to push down the price, these sellers will also choose not to sell. There has been no gamma squeeze in listed options products, which may indicate that these concerns are unfounded.
The concentration of options expiration can also cause short-term market volatility. Luuk Strijers, CEO of Deribit, stated that the expiration of Bitcoin options at the end of September was the second largest in history, with approximately $58 billion in open interest on Deribit. He believes that this expiration could result in the invalidation of over $5.8 billion worth of options, which could trigger significant market volatility after expiration.
https://www.coinglass.com/options
Historically, options expiration does indeed impact market volatility. As the expiration date approaches, traders need to decide whether to exercise their options, let them expire, or adjust their positions, which typically 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 expiration, option holders may exercise their options, which could create significant buying or selling pressure in the market. This pressure could lead to price fluctuations after the expiration of the options.
On the other hand, those who believe volatility will be dampened take a longer-term perspective. Option prices reflect implied volatility, which is the market’s expectation of future volatility. The introduction of IBIT brings new liquidity and attracts more structured products, which could potentially lower volatility as more options products enter the market to flatten it.
A larger pool of funds attracts larger players
The introduction of options will further attract liquidity, and the convenience brought by liquidity will further attract liquidity, forming a positive feedback loop of liquidity. Currently, it is almost a consensus in the market that the introduction of options is attractive to liquidity in terms of itself and the additional consequences it brings.
Options create more liquidity for the underlying asset as market makers engage in dynamic hedging strategies. The continuous buying and selling by options traders provides a stable flow of trades, smoothes price fluctuations, and increases overall market liquidity, allowing 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, as they often require complex instruments to hedge their positions. This ability lowers perceived barriers to risk 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. Simply relying on spot ETFs cannot solve these problems. Options can create highly complex structured products, allowing more institutional capital to participate in Bitcoin.
With the approval of IBIT options, investors are able to invest in Bitcoin volatility, considering the higher volatility of Bitcoin compared to other assets, which may result in 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 a CNBC interview, “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 cater to traditional investors, and the arbitrage opportunities that arise will increase the liquidity of both markets.
Varied price performance
The introduction of options not only brings more diversified trading opportunities for investors but also unexpected price performances.
For example, Joshua Lim found that many people were buying call options after the election, which means that people are willing to make some kind of hedge bet, believing that the regulatory environment for cryptocurrencies will relax after November 5. Usually, there is some price volatility around these option expiration dates, and this volatility tends to be highly concentrated. If many people buy options with a $65,000 strike price for Bitcoin, usually, traders will buy when the price is below $65,000 to hedge their risk and sell when the price is above this price, which will pin the Bitcoin price to the strike price.
If there is a certain trend, it often lags behind until after the expiration of the 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 as it marks the evaluation of hedge fund performance and share trading, creating inflows of funds and buying pressure in that asset class. Due to all these dynamics, the spot market does experience volatility after options expiration as perhaps there is reduced hedging activity by many traders before 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 traders to buy Bitcoin spot over the weekend to hedge their delta. There may be some risk in transferring Bitcoin to IBIT as IBIT is a cash settlement. All of these risks could ultimately spill over into the Bitcoin market, leading to wider bid-ask spreads.
Conclusion
For institutions, Bitcoin ETF options 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 market’s reflexivity. 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 to be validated by the market.
