Cryptocurrency Derivatives Series: A Glimpse At How CME Options Could Serve Its Hedging Functionality

The renowned derivatives marketplace, ‘CME Group’ has now announced that the options contracts would be available to its clients from January 13th, 2020, which is still pending for regulatory review.

Let’s just glance as to how CME options on futures can add flexibility in hedging bitcoin prices.

Just for an instance, a Bitcoin mining operation could hedge itself against a steep drop in the price of Bitcoin (BTC) by buying put options on the digital currency. 

The mining company could purchase Bitcoin puts with a strike price of $8,500 or $8,700 that is where the underlying price of BTC is currently showing its strong support and use a three-month tenor. 

That would imply that even if the price of Bitcoin was to plunge below that level, let’s suppose BTCUSD price tumbled below 7,000 level, then the Bitcoin put option contracts would be “in-the-money,” which would enable the miner (holder/buyer of the puts) will have an option to recuperate mining losses by exercising holder’s rights with earnings from the derivatives position. 

Should the price never drop to that level, the miner would only lose maximum to the extent of initial premium (i.e. the fee) paid to buy the put option. 

The CME Bitcoin options will use the CME CF Bitcoin Reference Rate (BRR) for pricing and will settle in the derivatives exchange’s CME Bitcoin futures contracts. That means the CME Bitcoin options will be options on futures contracts - not options that have “physical” Bitcoin as their underlying asset. This feature should make it easier for CME to receive regulatory approval for this new digital asset offering.

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