In the space of a few years, Bitcoin has surged—from something that couch potatoes trade for a slice of pizza via a Reddit thread, to one of the hottest commodities on the market.
In the last five years, total daily transactions in the Bitcoin market have risen 900%—from 33,800 to over 335,000, according to CoinDesk. As the cryptocurrency has become more popular, so have the instruments to trade it. More exchanges are opening up, and Bitcoin exchange traded funds (ETFs) may be on their way. But one tool that is already up and running is Bitcoin options. For years, Bitcoin option trading was not regulated in the U.S., but this looks set to change with a recent decision by the Commodity Futures Trading Commission (CFTC).
However, trading Bitcoin options is not for the fainthearted. They are extremely volatile and very expensive.
Bitcoin daily transactions
How Bitcoin Options Trade
Bitcoin options trade the same as any other basic call or put option, where an investor pays a premium for the right—but not the obligation—to buy or sell an agreed amount of Bitcoins on an agreed date. Additionally, various offshore exchanges offer binary options, where traders bet on a yes-or-no scenario—for example, whether or not Bitcoin will rise or fall, or whether or not it will be above or below a specific price on a specific day.
Why Are They So Expensive?
One major difference in trading Bitcoin options at the moment is the price. Bitcoin is one of the most volatile assets—if not the most volatile asset—trading at this time, meaning to buy an option is very expensive. Take a look at the pricing screen below for June 7, 2017.
An important tool in pricing an option is implied volatility (IV). As IV rises, so does the price of an option. The above pricing screen for options with a June 30 (22-day), 2017, expiry show implied volatility ranging from 90% to above 200% for strike prices from 2,000 to 3,300. How expensive is this? Very.
For example, on Oct. 2, 2017, the 30-day IV for the Standard & Poor’s (S&P) 500 was nearing record lows at 6.7%, according to data from the Options Industry Council (OIC)—and even in the height of the Great Recession, IV did not reach the types of levels that we are now seeing in Bitcoin trading. On Nov. 14, 2008, two months after the collapse of Lehman Brothers, short-term IV reached record highs of 65%.
Bitcoin Options Trading in the U.S.
After months of lobbying, Bitcoin options are soon to be legal in the U.S. On Oct. 2, 2017, the CFTC announced the approval of LedgerX for clearing derivatives. LedgerX, a digital currency platform, announced in May 2017 that it had raised $11.4 million via its parent company, Ledger Holdings, in the hope that the CFTC would rule in its favor—which the agency did.
“A U.S. federally-regulated venue for derivative contracts settling in digital currencies opens the market to a much larger customer base,” Paul Chou, CEO of LedgerX, said in a press release.
Chou said he expects the company to begin Bitcoin options trading in the fall of 2017 and hopes to extend to Ethereum later in the year.
The push for options was given further validity in October 2017, when the Chicago Mercantile Exchange (CME) announced that it plans to launch Bitcoin futures in the fourth quarter of 2017.
“Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a [B]itcoin futures contract,” Terry Duffy, CEO of the CME, said in a statement.
As cryptocurrency popularity grows, the products to trade the underlying asset will widen. Despite being relatively new, Bitcoin options trading is available in a handful of countries, which soon will include the U.S.
However, for those looking to dabble in options, be warned: They are expensive and volatile. So, buckle up.