The CME Group, which launched bitcoin futures trading in December 2017, is gearing up to launch bitcoin options in early 2020 according to a statement released by the exchange yesterday. This makes it the world’s first major trading venue to introduce options trading in bitcoin.
Other places to trade bitcoin options are located outside the United States. For example, Deribit, a major player in bitcoin options, was founded in 2016 and is based in the Netherlands.
But the number of venues for bitcoin derivatives trading is expected to multiply by next year. Bakkt, a trading platform backed by NYSE owner ICE, will begin offering bitcoin futures trading next week onwards. ErisX also hopes to capitalize on the demand for bitcoin derivatives “later this year.”
“These new (options trading) products are designed to help institutions and professional traders to manage spot market bitcoin exposure, as well as hedge Bitcoin futures positions in a regulated exchange environment,” stated Tim McCourt, CME Group global head of equity index and alternative investment products. He told the Wall Street Journal that they had been investigating Bitcoin options “for a long time” because the market had “continually asked” them for such a service.
Besides increasing the number of venues available for trading options in bitcoin, the CME Group’s move could also translate into increased liquidity in the cryptocurrency ecosystem. Brandon Elsasser, chief investment officer at Chicago-based hedge fund Victoria Capital, said CME’s foray could help pool liquidity from fragmented exchanges into CME. Previously, researchers have also posited that more venues for shorting bitcoin could minimize its price volatility.
An options contract is the right to buy or sell an underlying commodity at a future date. Options are derivatives, meaning their prices are based on another financial instrument or trade. In this case, bitcoin options would be based on CME’s futures contracts.
The volume of Bitcoin futures contracts at CME has been on an upswing this year. Approximately 7,000 contracts, consisting of five bitcoin each, are traded on a daily basis and 3,300 new accounts have been created at CME since launch of futures facility in 2017, the exchange stated.
Bitcoin options traders will have to contend with the rapid price moves in the cryptocurrency. Options trading relies on implied volatility of the underlying commodity to set contract prices. While the volatility in its price has declined significantly since 2017, bitcoin price is still prone to major swings. Those changes may be reflected in the contract price.