Crypto ETF Options Revolutionize Trading for Institutional and Retail Investors
The approval of options on spot Bitcoin ETFs by the US Securities and Exchange Commission in late 2024 marked a significant turning point for institutional and retail traders, offering a new way to interact with the crypto market. Before this change, traders had limited options: they could trade perpetual futures on offshore exchanges or use the limited options contracts available on platforms like Deribit.
The options on spot Bitcoin ETFs allow traders to buy calls and puts on shares of cryptocurrency exchange-traded funds (ETFs), giving them the right but not the obligation to buy or sell at a set price before a set date. The most actively traded include options on IBIT (BlackRock iShares Bitcoin Trust) and FBTC (Fidelity Wise Origin Bitcoin Fund).
The pricing of crypto ETF options follows the Black-Scholes framework, modified for the specific characteristics of crypto ETFs. Implied volatility is significantly higher for crypto ETF options compared to traditional equity options, making them more expensive in absolute terms. The high implied volatility means the absolute dollar amount of daily time decay is larger than for comparable equity options.