Institutional Investor’s Guide to CME Bitcoin Futures and Options
BRTI is a real-time index of the U.S. dollar price of one bitcoin, published once per second, 24 hours a day, 365 days per year.
BRR is a daily reference rate of the U.S. dollar price of one bitcoin as of 4 p.m. Greenwich Mean Time.
Each day, the BRR aggregates the trade flow of major bitcoin spot exchanges during a specific one-hour calculation window. This one-hour window is then partitioned into 12, five-minute intervals, where the BRR is calculated as the equally-weighted average of the volume-weighted medians of all 12 partitions.
This BRR calculation ensures tradability and replicability in the underlying spot markets.
The below factors have been addressed by the BRR methodology and associated frameworks:
The independent oversight committee is responsible for overseeing the scope of the Bitcoin Reference Rate by developing a code of conduct for the participants and regularly reviewing the practice, standards and definition of the reference rate to ensure it remains relevant and retains its integrity.
Globex
Globex is CME Group’s electronic trading platform. The number in this column represents the number of contracts traded electronically.
Learn more about Globex.
Open Outcry
Open outcry represents CME Group’s trading floor. The number in this column represents the number of contracts traded on one of CME Group’s trading floors. Open Outcry Futures reflect those transacted as covered option packages, as well as S&P futures where applicable.
Clearport/PNT
(Privately Negotiated Trades): ClearPort is CME Group’s clearing service for Over-The-Counter markets. PNT is an acronym for Privately Negotiated Trades, which may be reported through ClearPort or directly into CME Clearing. The number in this column represents the total number of Ex-Pit transactions, or transactions that were completed outside of Globex or Open Outcry trading venues.
Volume
The number in this column represents the number of contracts traded on the selected date for all CME Group venues (Globex, Open Outcry, ClearPort/PNT, and all other executions).
Open Interest
Open interest represents the total number of contracts either long or short that have been entered into and not yet offset by delivery. Each open transaction has a buyer and seller, but for calculation of open interest, only one side of the contract is counted.
Change
This column represents the day-over-day change in open interest.
CME’s Bitcoin futures contract, ticker symbol BTC, is a USD cash-settled contract based on the CME CF Bitcoin Reference Rate (BRR), which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin.
The vast majority of futures trades made by speculators are offset before final expiration. Some traders might allow their positions to expire; and in the case of bitcoin futures, would expire to cash settlement according to the Bitcoin Reference Rate (BRR).
However, a small group of investors, mainly institutions such as pension funds, endowments and money managers, might wish to extend their positions beyond the contract expiration.
The strategy that allows them to extend a futures contract from one expiration to the next is referred to as rolling the futures contract (or rolling forward). The transaction that effects this strategy is called a calendar spread.
A calendar spread allows a trader to exit the expiring contract and into a deferred contract in a single trade. By doing a calendar spread, a trader’s bitcoin futures position can be extended by one month or more depending on which deferred contract he rolls into.
Bitcoin futures at CME Group currently offers four : two serial month and two quarterly contracts.
A serial option is a short-term option on a futures contract that trades for the months when the underlying futures contract is not listed for sale. This allows traders to enjoy flexibility in matching their price expectations to a variety of time horizons.
BTC futures expire the last Friday of the month, and are listed on the nearest two months in the quarterly cycle plus the nearest two months not in the quarterly cycle.
Certain futures contract spreads carry different quoting conventions; stock index futures and treasury futures have completely opposite conventions for buying and selling calendar spreads during the roll process.
Bitcoin futures follow the same convention as stock index futures, in that buying the spread means buying the deferred contract and selling the nearby.
CME Group staff determines the daily settlements for the out of the money options based on market activity throughout the day, on all venues (including, but not limited to, CME Globex, CME ClearPort, CME Direct and the trading floor, as applicable).
In response to growing interest in cryptocurrencies and customer demand for tools to manage bitcoin exposure, CME Group plans to launch options on Bitcoin futures (BTC) on January 13, 2020.
CME Bitcoin futures provide an efficient tool to access the bitcoin market and hedge any direct exposure to bitcoin pricing. In response to customer demand for additional bitcoin trading tools, CME Group is listing options on Bitcoin futures.
CME options on bitcoin futures settle into 1 bitcoin futures contract upon termination of trading. As you know, the CME Bitcoin futures contract represents five bitcoin and cash settles to the CME CF Bitcoin Reference Rate (BRR).
Therefore, an option on Bitcoin futures provides that same exposure to five bitcoin. Options on Bitcoin futures will mirror the underlying Bitcoin futures listing cycle and will be quoted in US dollars per one bitcoin.
Different futures expirations may be trading at different prices. For example, assume it’s November and the December Bitcoin futures contract is trading at 7900. Whereas, the January bitcoin futures contract is trading at 8100.
Prices of options with a December expiration will follow the December futures and prices of options with a January expiration will follow the January futures contract.
The minimum price fluctuation, or tick increment, for options on Bitcoin futures will depend on the options cost, or premium, which can be affected by several factors — including the price of the underlying futures, volatility, interest rates, and time to maturity — to mention a few.
The minimum tick is generally five points — equal to $25 per option. If the option is priced at or below 25, the minimum tick is reduced to one point — equal to $5.
The strike intervals of options on Bitcoin futures will encompass a wide range and will be dynamically generated every night.
Options on Bitcoin futures will expire the same day as the underlying Bitcoin futures contract expires, which is the last Friday of the contract month.
These options are European style — which means they can be exercised only at expiration and therefore option sellers cannot be assigned prior to expiration.
However, a position could be closed prior to expiration by trading out of the position. Please be aware that trading terminates at 4:00 p.m. London time on the last Friday of the contract month.
CME options on Bitcoin futures will trade on an established regulated exchange and are centrally cleared through CME Clearing — therefore eliminating counterparty — or claw back risk.
They will be available to trade on CME Globex, Sunday afternoon through Friday afternoon, nearly 24 hours per day and are block trade eligible
Bitcoin futures and options are margined as a portfolio, providing greater capital efficiency. There you have it, options on Bitcoin futures, another option to manage bitcoin risk or speculate on th price of bitcoin.
Trading example
Assume that on the final trade date of the December futures contract, the BRR prints at 8124.
A December call option struck at 8000 will also expire on the same day. And because it expires in-the-money, the call will be exercised.
Assume the option cost was 50 points — or $250 in premium. The long call holder will automatically buy the December Bitcoin futures contract for 8000. This futures contract will then settle at the BRR price of 8124.
The long call option holder will receive $124 per bitcoin equivalent or $620 in total, as each contract represents five bitcoin. Making the net profit 74 points or $370.
Suppose another trader is long the December 8500 call option. This call option is out-of-the-money, will expire worthless, and will not result in a futures delivery. The loss on the position is limited to the premium paid for the option.
As you may be aware, spot bitcoin pays no dividends or interest. Moreover, while spot bitcoin is, for all intents and purposes, nearly impossible to sell short, it is relatively easy to sell short Bitcoin futures contracts. Given that no wallet risk exists with futures; you do not need a wallet when you trade futures but do when you buy bitcoin on the spot market.
These factors will influence how futures in deferred calendar months will be priced. In a surging bull run, it’s likely the spread will become more positive. In a severe bear market environment, the spreads could go negative and deferred contracts could become much cheaper than nearby.
Given that Bitcoin futures are new a carry relatively high volatility, it behooves investors large and small to be aware of these nuances.
Published at Thu, 28 Nov 2019 12:51:35 +0000
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