Tom Lydon (CEO of ETF Trends) and Nick Colas (co-founder of DataTrek Research), discuss 2020 prospects of bitcoin, cannabis, and ESG with CNBC’s Bob Pisani.
They are finally here. On Monday, the Chicago Mercantile Exchange launched exchange-traded bitcoin options.
Because options can be used by traders to determine risk and express almost any market thesis, they are sought after by all types of traders. The bitcoin rally that saw 1 ,900% rise in 2017 was followed by an 82% crash that ended in 2018..
Traditional options give the buyer the ability to either purchase or sell the underlying asset if it is a call option. Futures options are slightly different. The owner of a call option can take a long position at expiration in the bitcoin futures contract that is traded at the CME. However, the owner of the put option can take a position in bitcoin futures.
The ability to identify risk, regardless of the instrument used, comes at a price. As you would expect for any volatility, options on bitcoin futures can be very expensive. Traders often refer to an option’s cost in terms of implied volatility, or the level of volatility implied by its current price.
Options on bitcoin futures indicate extreme volatility. Just after midday on Monday, the $8,000-strike put options expiring in April were trading at 72% implied volatility, suggesting that traders believe bitcoin is likely to be between $6,965 and $9,940 when those April options expire. This is a range 37%, with bitcoin futures starting at $8 ,130.. Comparatively, the April options for S&P are below 12% implied volatilty.
The buyer of a $9,000-strike call option expiring in April would have to pay about $1,075 for the call, meaning bitcoin futures would have to be above $10,075 for that call purchase to be profitable at expiration. The buyer of an $8,000-strike put option expiring in April would have to pay about $1,165, meaning bitcoin futures would have to be below $6,835 at expiration for the put purchase to be profitable. This would require some movement.
Any trader who wants to trade bitcoin futures options will have to face a market. This is the difference between the offer price and the bid for an option. For example, the market for those April $8,000 put options is about 250 points wide.
However, this doesn’t mean that option sellers will be any happier. If bitcoin resumed its rally in 2017., the seller of a naked option would be subject to unimaginable losses.
Options on bitcoin futures are a powerful tool for cryptocurrency speculators. For speculators of other asset classes, it’s been known for some time that there are options available to reduce losses and provide unique payoff profiles. Investors and speculators alike benefit from having more options.
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