Tim McCourt, CME Group’s global head of equity products and alternative investments believes that the upcoming launch of Bitcoin options contracts will likely become a favorite of Asian crypto miners and traders.
Traders in for Huge Benefits
CME Group announced the launch of its new crypto-derivative product on the 20th of September. The update mentioned that options on Bitcoin Futures will offer Bitcoin traders a good opportunity to save on margins through margin offsets.
Further, the CME CF Bitcoin Reference Rate ( BRR) will be calculated on the basis of the daily trading volume of major Bitcoin exchanges and trading platforms.
The options will further help traders mitigate possible risks of counterparty default with a central clearing. Moreover, this will expand choices for traders and help them in managing risk and building strategies, as it will support flexible trading.
Steep Rise in Bitcoin Futures Trading
McCourt expects that the options will perform equally well as Bitcoin Futures, which were launched almost two years ago. Interestingly, half of the trading volume for Bitcoin futures is made up of traders in the Asian and European subcontinent.
He further gave insights on the recent surge in trading of Bitcoin Futures. On the 13th of May futures contracts worth US$1.3 billion ( 170,000 Bitcoin) were traded. Subsequently, with the provision for “options” on futures, traders can easily manage the price risks of Bitcoin while gaining the right exposure.
“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 [assets] price,”
Per a recent tweet by CME, despite the decline in Bitcoin prices, customer interest in CME Bitcoin futures remained strong during Q3 with daily OI of over 4.6K contracts, up 61% vs Q3 2018.
What is an Options Futures Contract?
An options contract allows an investor to buy or sell an asset at a specific strike price. The investor can buy it on or before the expiration date. This puts the investor in an advantageous position as he/she can take advantage of price fluctuations without actually owning a futures position. However, the future contract places an obligation on the investors to buy/sell the asset at the contracted price at a specified future time.
CME Has No Plans of Offering Physically Settled Contracts
He further said that Bitcoin options will enable crypto miners to precisely hedge the cost of their production. Miners operating in China are already using Bitcoin futures contracts to hedge. McCourt also talked about the launch of Bakkt and said that the CME group has no plans to offer similar physically-settled contracts. Furthermore, he said that the present focus is on securing regulatory approvals and finalizing the preparations for the new option contracts’ launch.
However, Jeff Dorman, chief investment officer and co-founder of Arca, a US crypto hedge fund seemed to disagree with the former’s claim. He said that effective cryptocurrency trading strategies would come from additional instruments- beyond Bitcoin.
“There is only so much you can do with just bitcoin alone, [as] there are only that many venues a fund would need to trade bitcoin and bitcoin-related securities,”
He further added that in the future CME group would face stiff competition.
CME to Launch Two Financially Settled Shanghai Gold Futures
Per the announcement, Shanghai Gold Futures will be a product offering based on the regional gold benchmark price from the Shanghai Gold Exchange (SGE). The launch is slated for the 14th of October.
The contracts will be denominated by the US Dollar and the Chinese Renminbi. The futures will be launched by an arm of CME- Commodity Exchange Inc (COMEX). COMEX’s Shanghai Gold futures will provide access to arbitrage with 100 oz. Also, it will capture margin offset benefits between COMEX 100 oz. Gold Futures (GC) and other CME Group products. The futures will use Shanghai Gold Benchmark PM price (15:00 China Standard Time) for the final settlement.
Will CME’s “Options” have the same impact as Bitcoin futures? Let us know, what you think in the comments below!