Derivatives exchange CME has announced the launch of bitcoin options in 2020. This gives speculators an alternative to mechanism for accessing cryptocurrency markets.
The move will see the first options going on sale on January 13 2020. This is pending approval from market regulators. The Chicago-based exchange operator is hoping they will prove as successful as their bitcoin futures. This launched nearly two year ago.
Each option will represent one bitcoin futures contract. This contract is made up of 5 BTC. The option provides investors and speculators with another derivative instrument for speculating on BTC price variation. This is something CME says its clients are increasingly expressing interest in.
Welcoming the announcement, CME’s global head of equity index and alternative investment products Tim McCourt said clients need access to derivatives to allow them to effectively manage risk in crypto and other asset classes.
“Since the launch of our Bitcoin futures nearly two years ago, clients have expressed a growing interest in options as another way to hedge and trade in these markets. We have worked closely with clients and the industry to establish a robust and increasingly liquid underlying futures market here at CME Group, and we believe Bitcoin options will now offer our customers greater precision and flexibility to manage their risk”.
When futures contracts launched in 2017, there were significant implications for price in bitcoin markets. Some analysts credit the launch of futures in part with stalling the rampant bull run at the time. This saw BTC prices reach all-time highs of near $20,000.
But what value can investors expect from bitcoin options? And, are they worth the punt come January for those going long on BTC?
What Is A Bitcoin Option?
Options are a type of derivative. That is, a traded instrument, like a contract, based on an underlying asset. In this case, that asset is a bitcoin futures contract. So it’s the option to buy a bitcoin futures contract at a price specific today, at some future point.
Investors buy options in the hope that the value of the underlying asset increases over time. At this stage, they trigger the option to buy the underlying asset for a cheaper price, sell it and pocket the difference. In many cases, options are settled for cash rather than assets, which strips out this intermediate stage but delivers the same net result.
The options being planned by CME are intrinsically linked to the futures contracts it offers, and ultimately, settlement comes in the form of those futures, rather than the underlying cryptocurrency itself. So why would anyone trade them? Who do options benefit?
Why Trade Bitcoin Options?
Options don’t compel investors to transact at any future date. You can buy an option and allow the option to lapse if it is advantageous to do so. Similarly, you can choose to trigger the option when the market moves in your favour, for maximum returns.
Unlike just investing in bitcoin futures from the get go, options don’t tie you into any obligations. They simply confer the right to buy bitcoin futures at a set price at some later date.
Investors don’t need to buy any crypto directly. Therefore, there are no concerns about secure storage and custody, no matter the size of the position traded. And the options themselves are often traded on margin, with the liquidity benefits of being traded in an open exchange environment.
If what CME is saying is reflected across a wide range of investors, there appears to be appetite for more crypto derivatives. Bitcoin options will fill that gap for some speculators. It could be a useful tool for some, especially when it comes to hedging other crypto positions or spreading portfolio risk.
For the average crypto trader, margin and leverage are likely to be the biggest advantage from trading these options. This is along with the security and structure of instruments trading on a public market.
However, this does come with caveats – where there’s leverage, there’s always increased risk. And in a market that is historically as volatile as bitcoin and cryptocurrency, too much leverage can quickly become a dangerous thing.
Given CME’s reputation and their track record with the rollout of futures in 2017, it looks like the launch is in safe hands. It’s up to individual speculators to judge the medium to long-term picture. Also, whether options are the best way to deliver that exposure.