CME Bitcoin Options launch to strong interest

In response to the growing demand for this type of financial derivative, Chicago-based derivatives exchange, CME, has launched bitcoin options trading. The CME bitcoin options are options on bitcoin futures contracts. That means no “physical” bitcoin exchange takes place when the options contracts expire. Instead, options are settled in CME bitcoin futures.

CME Options on Bitcoin Futures go live

CME Group offers options on bitcoin futures contracts with strike prices ranging from $1,000 to $70,000 and expiry dates up to December 2021. Each options contract has one futures contract worth five bitcoin as the underlying and is denominated in US dollars.

CME Bitcoin options are European style, which means they can only be exercised at expiry, and use the regulated CME CF Bitcoin Reference Rate (BRR) for pricing.

For miners and bitcoin businesses who are looking to hedge their long BTC positions, CME bitcoin options offer an ideal solution. As options provide the holder with the right but not the obligation to buy (or sell) the underlying asset at a predetermined price, it allows hedgers to protect themselves against a drop in the price of bitcoin at a relatively low cost without losing out on the potential price upside.

Speculators, on the other hand, can use the new CME options to place leveraged bets on the price development of bitcoin.

A very bullish speculator, for example, could purchase a Dec-20 call option with a strike price of $50,000. Should the price of bitcoin (BTC) rally above $50,000 by the end of the year, the buyer of the option would generate a profit, calculated by the difference between the price of the underlying bitcoin futures reference rate and the $50,000 strike price minus the option premium (i.e. the price of the option).

CME beats Bakkt on day one

On the first trading day, more bitcoin options contracts were traded on the CME than on the ICE-backed bitcoin trading platform, Bakkt, which introduced the bitcoin derivative in early December.

CME Group traded 55 contracts with around $2.1 million worth of bitcoin while its New York-based competitor, Bakkt, only saw around $1.15 million in option trading volumes. These figures indicate that there is interest among traders for this type of derivative and that we could expect trading volume to increase throughout the year.

The real question, however, is whether bitcoin options will entice more professional and institutional investors to enter the digital asset markets. A recent record high in CME bitcoin futures large open interest holders, which is composed of entities that hold over 25 BTC, would suggest that the interest for regulated bitcoin derivatives trading is on the rise.