Option traders must decide the time period and price level they want to participate in the market and plan their trading strategies accordingly. These are referred to as the option’s expiration date and strike price.
When trading options on bitcoin futures at CME Group, traders have the flexibility to choose between different contract expirations and strike prices.
First, let’s look at the contract expirations. CME Group will list six consecutive months of options on Bitcoin futures. Also, there will be two December options contracts. However, if the current year’s December contract is one of the front six consecutive listings – there will be only one additional December listing.
Each option will expire into its underlying futures contract, and that futures contract instantaneously settles into cash.
For example, assume it’s January of 2020. The six consecutive monthly futures listed are: January, February, March, April, May, and June. The December 2020 and December 2021 contracts will also be listed.
During the January through May expirations, as these contracts expire, a new contract will be listed on the back end of the sixth month series. When June expires, there will be no need to add a December expiration because it already exists.
During the July through November expirations, a contract is added. Following the December 2020 expiration, June 2021 is added along with a December 2022 expiration.
The details of the listing cycle can be found on the contract specifications page.
Now let’s discuss the strike prices of options on bitcoin futures.
An option’s strike is the price at which a call owner can purchase, or a put owner can sell, the underlying futures contract. Multiple strike prices will exist with the same expiration date. This set of strike prices is referred to as the strike range.
The strike range extends above and below the current futures price so that risk can be managed whether the futures price increases or decreases.
Due to the volatility of bitcoin futures, the strike range for options on Bitcoin futures can range from below 1,000 points to as high as 600% of the Bitcoin futures settlement price. This range allows traders to hedge their risk or express an opinion on potentially large movements in Bitcoin at a lower cost than the “at the money” strikes.
Dependent upon the Bitcoin futures price or expiry, strike intervals will be available at 50, 100, 500, 1,000, and 10,000. The strike increment for very far, out-of-the money strikes will be larger than for the ‘at the-money’ strikes. Near-the-money strikes will be more granular to allow for greater precision when hedging. This is will applicable across all monthly listings.
Additionally, CME will be listing more granular strike intervals as option expiration approaches – again allowing more precision when hedging. Additional strikes may be added based on the movement of the Bitcoin futures price. CME Group will manage the listing daily to ensure that appropriate instruments are available.
In practice, market participants are able to see the available strike prices on the CME Globex electronic trading system. Let’s look at an example.
Assume, today is January 1st and we are following a June options contract. The June Bitcoin futures are trading at 8,000.
Options on Bitcoin futures have strike price intervals of 10,000 points up to 600% of the previous day’s underlying futures settlement price – rounded down to the nearest ten thousand. And 1,000 points up to 400% of that same underlying – rounded down to the nearest thousand.
As the price of the Bitcoin futures contract moves, CME Group will list additional strikes at the appropriate intervals. Fast-forwarding four months to May, let’s assume the price of the Bitcoin futures contract had rallied above 12,000.
Ten-thousand point intervals would have been added from the initial 40,000 - up to 70,000. Thousand-point intervals would have been added from the initial 32,000 - up to 48,000.
Because these June options are within two months of expirations, strike increments of 500- and 100-point intervals will have been added near the price of the underlying Bitcoin futures. Additionally, if the Bitcoin futures price falls below 5,000 with less than two months until expiration, CME will add strikes at 50-point intervals. Strike prices will be added, as necessary, but will not be removed once listed.
CME Group options on Bitcoin futures provide traders a variety of strikes and expirations. This enables multiple trading strategy “options” to manage bitcoin price risk or express a view on the price of bitcoin.