CME Bitcoin futures provide an efficient tool to access bitcoin exposure and manage risk. In response to customer demand for additional bitcoin trading tools, CME Group is listing options on Bitcoin futures.
The underlying for CME options on Bitcoin futures is one CME Bitcoin futures contract. As you know, the CME Bitcoin futures contract represents five bitcoin and cash settles to the CME CF Bitcoin Reference Rate (BRR).
Therefore, an option on Bitcoin futures provides that same exposure to five bitcoin. Options on Bitcoin futures will mirror the underlying Bitcoin futures listing cycle and will be quoted in US dollars per one bitcoin.
Different futures expirations may be trading at different prices. For example, assume it’s November and the December Bitcoin futures contract is trading at 7900. Whereas, the January bitcoin futures contract is trading at 8100.
Prices of options with a December expiration will follow the December futures and prices of options with a January expiration will follow the January futures contract.
The minimum price fluctuation, or tick increment, for options on Bitcoin futures will depend on the options cost, or premium, which can be affected by several factors – including the price of the underlying futures, volatility, interest rates, and time to maturity – to mention a few.
The minimum tick is generally five points – equal to $25 per option. If the option is priced at or below 25, the minimum tick is reduced to one point – equal to $5.
The strike intervals of options on Bitcoin futures will encompass a wide range and will be dynamically generated every night.
Options on Bitcoin futures will expire the same day as the underlying Bitcoin futures contract expires, which is the last Friday of the contract month.
The options deliver the futures contract that then instantaneously expires into cash.
These options are European style - which means they can be exercised only at expiration and therefore option sellers cannot be assigned prior to expiration.
However, a position could be closed prior to expiration by trading out of the position. Please be aware that trading terminates at 4:00 p.m. London time on the last Friday of the contract month.
Let’s consider an example.
Assume that on the final trade date of the December futures contract, the BRR prints at 8124.
A December call option struck at 8000 will also expire on the same day.
And because it expires in-the-money, the call will be exercised.
Assume the option cost was 50 points - or $250 in premium.
The long call holder will automatically buy the December Bitcoin futures contract for 8000. This futures contract will then settle at the BRR price of 8124.
The long call option holder will receive $124 per bitcoin equivalent or $620 in total, as each contract represents five bitcoin.
Making the net profit 74 points or $370.
Suppose another trader is long the December 8500 call option. This call option is out-of-the-money, will expire worthless, and will not result in a futures delivery. The loss on the position is limited to the premium paid for the option.
CME options on Bitcoin futures will trade on an established regulated exchange and are centrally cleared through CME Clearing – therefore eliminating counterparty - or claw back risk.
They will be available to trade on CME Globex, Sunday afternoon through Friday afternoon, nearly 24 hours per day and are block trade eligible
Bitcoin futures and options are margined as a portfolio, providing greater capital efficiency. There you have it, options on Bitcoin futures, another option to manage bitcoin risk or speculate on the price of bitcoin.