CME Group, a leading derivatives marketplace, has launched the options of Ether futures, given that the much-anticipated merge has been pushing demand.
Tim McCourt, the global head of Equity and FX products at CME Group, pointed out:
“As market participants anticipate the upcoming Ethereum Merge, a potentially game-changing update of one of the largest cryptocurrency networks, interest in Ether derivatives is surging.”
Since the merge is slated for September 15, CME Group intends to offer more flexibility with the Ether options. Leon Marshall, the global head of sales at Genesis, stated:
“The launch of the new Ether options contract ahead of the highly anticipated Ethereum Merge provides our clients with greater flexibility to trade and hedge their Ether price risk.”
The merge is anticipated to be the largest software upgrade in the Ethereum ecosystem because it will change the consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS).
Therefore, the new options will complement CME Group’s Ether futures, which have recorded a 43% surge in average daily volume year-over-year.
Rob Strebel, the head of relationship management for DRW, said:
“As ether transitions through the anticipated merge this week, we expect we’ll continue to see strong demand for this Ether options contract.”
Since the Ethereum merge has been awaited with bated breath by the crypto community, the network’s speculative action has skyrocketed, Blockchain.News. The open interest shown in the ETH network highlighted that buying pressure outweighed selling.
On the other hand, a hard-fork mechanism is expected to be deployed within 24 hours after the merge.
The Federal Reserve is raising interest rates at the most aggressive rate in nearly 30 years. With inflation at an all-time high and a looming recession, protecting capital is at the forefront of every investor’s mind.
Cash and government bonds were once safe assets during bear markets, but with inflation running amok and central banks struggling to stabilize bond yield curves, these traditional safe havens are looking shaky.
Options contracts can be a good way to hedge some of your risks, as they give you the right, but not the obligation, to trade an asset in the future at a predetermined price. A call option is the right to buy, and a put option is the right to sell.
There are two styles of options contracts. A trader using American-style options can exercise his or her contract at any point during the lifetime of the contract, whereas European-style options can only be executed only at the expiry date.
If it is not profitable to exercise your put or call option at the date of expiry, you can let it expire and take no action. In this scenario, your cost is limited to the amount of money you paid for the options contract when you bought it.
Multiple trading strategies use options contracts. But in this article, I’d like to share some approachable strategies that allow a certain amount of protection without needing to sell your assets.
Let’s take Bitcoin as the underlying asset. If you buy a put option at a strike price equal to or higher than the current price, it gains value as Bitcoin moves lower.
So, if your Bitcoin is in the red, your options contract will be green. And, if the market trends higher, nullifying your option, then Bitcoin will have appreciated covering some of the cost of the contract.
This strategy is best suited to traders who hold Bitcoin as long-term investments and do not wish to sell. This allows them to avoid a worst-case scenario: cascading liquidations that drag Bitcoin down dramatically. Buying a put is like buying insurance for downside risk.
So, if you suspect a further leg down is on the horizon, you can buy a put option as a type of insurance that pays out should the market move lower. Timing is crucial, especially during a bear market.
For example, if you believe the market will trend lower very quickly in the following days, buying a put may well be worth the initial investment, but if the market moves down slowly. You may not be able to recover the premium you paid to buy the put option. The same principle applies to call options as well.
Another popular use of options contracts is selling call options while holding the underlying asset. You can be paid immediately by selling a call option to another party, giving them the right to buy your Bitcoin should the price increase to or beyond a certain amount.
For example, if you sell a call option agreeing to sell 1 BTC at $30,000, you collect the price of that contract — the premium — right away, which acts as a hedge against the downside. Your only risk would be missing out on any gains beyond the strike price, which would be owned by the buyer of the option.
If Bitcoin doesn’t hit the strike price, then the option expires, and you keep the premium. The main risk with this strategy is that the underlying price of Bitcoin falls in the interim.
The bear market affecting crypto and other capital markets is a time to protect capital, so when the good times return, there will be plenty of opportunities to reallocate. Bitcoin price could whipsaw traders in troubled times. By using the options hedge, you can create a more robust portfolio while still HODLing your Bitcoin stack.
A new paper released on Thursday from a team of crypto researchers hopes to add to a body of work that will eventually identify “the Black-Scholes of decentralized finance (DeFi)” — an equation that will allow investors and users to properly value DeFi projects and potential profit/loss metrics in popular DeFi verticals such as liquidity mining.
Why is such an equation important? At first blush, liquidity mining is simple enough to explain: in exchange for providing liquidity to automated market makers like Uniswap, users are rewarded with trading fees or governance tokens, often denominated in APY percentages.
However, users suffer “impermanent losses” related to fluctuations in demand for the trading pair, and a simple APY calculation on a user interface frontend isn’t sufficient to paint a full picture for what the gains might look like for liquidity providers.
According to research from Tarun Chitra, founder and CEO of DeFi risk analysis firm Gauntlet.Network and one of the three co-authors of When does the tail wag the dog? Curvature and market making, liquidity mining is best thought of as a complex derivative.
⚠️ Paper Alert ⚠️
Q: Have you wondered about math for the following?
a) Optimal token qty to emit for yield farming incentives
b) Hedging impermanent loss w/ options
c) When do LPs not get rekt?
A: New paper from moi, @alexhevans, @GuilleAngeris https://t.co/VeJjtSK038
— Tarun Chitra (@tarunchitra) December 17, 2020
“Most passive investment products often times have non-trivial derivatives-like exposure. For instance, the collapse of the ETF XIV in February 2018 (“volmageddon“) illustrated how some assets that are “passive” and “safe” have complex exposure,” Chitra explained to Cointelegraph. “Liquidity providing in AMMs is not so different, although it presents a new set of risks to holders. Liquidity providers are always balancing fees earned (positive income) with large price moves losses (negative, impermanent loss).”
These complexities have led to the failure of many liquidity mining projects due to overincentivization (“1e9% APY isn’t sustainable, too many LPs and no traders”), or underincentivization from developers not offering enough rewards to counterbalance impermanent losses. Ultimately, users and developers “should think of farming as a complex derivatives analogue of maker-taker incentives on centralized exchanges.”
Additionally, this new conceptual model may allow for more sophisticated decision making from liquidity providers, as well as more robust architectural frameworks for AMM developers.
“This paper provides a principled way for developers and designers to provide LP returns that make sense,” said Chitra. “APY only makes sense for fixed income assets (bonds), whereas derivative pricing makes MUCH more sense for something like liquidity provision. We hope this is the first in the line of many works that try to find the ‘Black-Scholes of DeFi.’”
According to Chitra, successfully identifying a DeFi-equivalent to the Black-Scholes model might also be the key to mass DeFi adoption. Developed in the 1980s to help investors find ways to properly price stock options, Black-Scholes led to a massive boom in derivatives trading.
While it remains to be seen if a new model can cut so cleanly through DeFi’s complexities, this paper appears to be a promising first step.
Bitcoin traders can now bet on a potential price rise to $100,000 via crypto derivatives exchange Deribit’s new options contracts.
Call and put options at the $100,000 strike price expiring on Sept. 24, 2021, went live on Deribit Thursday.
“A few trades have taken place, as thus far 45 [call option] contracts have been traded,” Luuk Strijers, chief commercial officer at Deribit, told CoinDesk.
At press time, the $100,000 call option is holding a cumulative open interest of 29.4 contracts. Open interest refers to the number of contracts traded but not liquidated via offsetting positions. The $100,000 put option is yet to register any activity.
Options are derivative contracts that give the purchaser the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option represents the right to buy, and the put option gives the right to sell. On Deribit, one options contract represents the right to buy or sell one bitcoin.
Theoretically, the purchase of a $100,000 call is a bet that bitcoin will rise above that level on or before Sept. 24, 2021, making the option “in-the-money”. Traders, who expect prices to more than quadruple over the next three quarters from the current price of $23,200, can express their bullish view via the $100,000 call.
Currently, that call option is, as traders say, deep out-of-the-money (that is, the spot price is well below the strike price) and trading at a relatively low price of 0.0475 BTC ($1,090 at press time). By comparison, the $24,000 call is trading at 0.2870 BTC ($6,588).
Traders often buy deep out-of-the-money calls during strong bull runs. That’s because they are relatively cheap and gain significant value amid a continued rally in the spot market, helping buyers make big money on small investments.
Deribit’s decision to launch options at the $100,000 strike comes in the wake of bitcoin’s move into the uncharted territory well above $20,000. The cryptocurrency rose swiftly through $21,000 and $22,000 to set a record high of $23,770 on Thursday. The crypto asset changing hands near $23,100 at press time, according to CoinDesk 20 data.
The decision to launch options for the $100,000 strike expiring in September 2021 was based on market demand and in line with Deribit’s policies, Strijers said.
The largest lot of Bitcoin options before the end of the year expired on Nov. 27. The number was recorded as 78,000 Bitcoin (BTC) with a notional value of $1.3 billion, according to data analytics firm Skew.
A huge number of Bitcoin options
Skew noted that the expiry of this huge number of BTC options signalled the biggest lot until the close of the year. The data analytics firm also availed insights showing that Bitcoin spot trading and BTC derivatives were doing well in spite of the recent 10% correction by the leading cryptocurrency.
Bitcoin has been on a price frenzy because, after a bullish rally where the BTC price soared to around $19,500 on certain exchanges. The digital asset underwent a notable price correction, Bitcoin dropping below $16,500.
However, market analysts had explained that a price correction was expected of the mainstream cryptocurrency, at least if one were to look at it from a historical point of view. Previously, after a massive bull run, Bitcoin’s price has been known to fall back slightly on crypto exchanges.
For instance, the Bitcoin pricecorrected sharply to $17,250 as a number of crypto whales moved their BTC holding to exchanges. Some of the factors attributed to this price correction included a short-term resistance level, the fear of missing out (FOMO), and selling-off pressure by BTC whales.
Next expiry expected on Christmas Day
The next largest Bitcoin options at 66,500 BTC is expected on Christmas Day. Skew has also disclosed that CME has emerged to be one of the biggest Bitcoin futures markets favored by financial institutions.
This is because its open interest stands at $1.16 billion, with OKEx coming second at $1.07 billion, even if it witnessed a Bitcoin exodus after reopening its withdrawal services that had remained closed for weeks after one of its private key holders decided to cooperate with a public security firm in regard to an ongoing “investigation.” Therefore, high open interest in Bitcoin futures signals the growing demand by institutional investors.