Cryptocurrency Derivatives Series: Heads-up on CME Options Launch

The recent buzzing news in the gamut of cryptocurrency is that the CME’s announcement of launching plans of options trading facility on its bitcoin futures most probably during the first quarter of 2020 as it is awaiting for the regulatory approval. The listing is only subject to the regulatory review and compliance, the contract would be a welcome development in that it expands the alternatives for investors to manage risk.

The CME Group’s global head of equity products and alternative investments, Mr. Tim McCourt, reveals his the expectations of the strong demand from miners and traders based in Asia, he told to the South China Morning Post about the mounting demand sentiments in this region. 

He perceives Bitcoin Futures are on the table and already a on track with considerable popularity for Bitcoin companies and investors to hedge their digital currency exposure. Companies that are naturally long Bitcoin, such as miners, are major users of Bitcoin futures. On the flip side, Bitcoin options will equip companies and investors with various strategies to mitigate risk associated in a more precise manner and the CME is targeting this area.

“While futures give you a one-for-one exposure, whereby the movement of the underlying Bitcoin translates directly to a specific dollar value per contract, an option gives you varying strike-price levels and can give you either downside protection, or upside exposure at a fraction of the underlying asset’s price,” said McCourt.

Hence, he foresees the upcoming CME Bitcoin options to strike a chord among the investors’ and traders’ community. CME Bitcoin futures experienced the best-ever day on May 13, 2019, when 34,000 futures contracts worth $1.3 billion were traded on the derivatives exchange. 

On the back of this news, CME announced the customer interest in CME Bitcoin futures remained robust during Q3 with daily OI of over 4.6K contracts, up 61% vs Q3 2018 despite the fallout in the bitcoin prices, thereby, one can make out the growing interest in cryptocurrency derivatives for hedging reasons.

European and Asian traders make up around half the trading volume for Bitcoin futures, which would suggest that the upcoming CME BTC options may see a similar target audience. With the bulk of Bitcoin miners located in Asia, the CME’s prediction of high demand out of Asia will likely turn out to be correct.