Options on bitcoin ETFs could come soon, offering hedging tool for institutions

Following the US Securities and Exchange Commission’s milestone approval of spot bitcoin ETFs earlier this month, options for these funds might soon be available.

Such derivatives could prove an important tool for institutional investors looking to hedge risk, according to industry participants — and are expected to come without many hurdles.

An option is a contract representing the right to buy or sell a financial product at a certain price for a specific period of time. ETF options saw average daily volumes amounting to roughly 17.9 million contracts in 2023, according to Options Clearing Corporation (OCC) data — a 12% increase from the prior year.

Read more: Bitcoin ETF Tracker

The Cboe Options Exchange submitted a proposal to the SEC on Jan. 5 seeking to list options on exchange-traded products (ETPs) that hold bitcoin. The filing came about a week before the regulator officially greenlit such ETFs. 

NYSE Arca and Nasdaq followed suit days later, separate disclosures indicate. 

Though Cboe’s rules generally permit it to list options on ETPs three days after they start trading, they don’t apply to such products holding commodities like BTC, the company said in a filing.  

“Cboe intends to list these options as soon as all regulatory approvals are received, which is expected later in 2024,” the company noted. 

The SEC noted in Jan. 19 filings that it would seek comments on the three stock exchanges’ proposals during a 21-day period. 

The Nasdaq-related filing refers directly to BlackRock’s iShares Bitcoin Trust (IBIT). The exchange would open at least one expiration month for options on the trust. It could also list such options for trading on a weekly or quarterly basis.  

Nasdaq believes that options on IBIT would offer investors “an additional, relatively lower cost investing tool to gain exposure to spot bitcoin as well as a hedging vehicle to meet their investment needs in connection with bitcoin products and positions,” the disclosure states.

Read more: BlackRock beats spot bitcoin ETF rivals in race to $1B assets 

Chase White is a senior analyst at Compass Point Research and Trading. He told Blockworks that options on the spot bitcoin ETFs are likely to appeal to institutional investors looking to hedge their downside risk in the funds, whether they’re long or short the ETFs.

“We also expect some level of institutional investor speculation via the options, because many of them don’t have the mandate to transact in options [and] derivatives directly tied to BTC — much like they don’t have the mandate to trade BTC itself,” White said.

As more financial advisers start to allocate a portion of client funds to the ETFs, such professionals could use options to protect against downside risk without having to take taxable gains on the ETF positions, he added.

Matt Lason, chief investment officer of crypto hedge fund Globe 3 Capital, said options on spot bitcoin ETFs reflect the “natural progression of financial instruments” given that “the dam has broken open” following the SEC’s approval of such funds.  

Read more: The crypto world reacts to day one of bitcoin spot ETF trading

“We believe the SEC would be quick to allow the listing of options on spot bitcoin ETFs as it does not require the ownership of the underlying asset,” he told Blockworks. “Even though these options and derivatives do not create direct ownership in bitcoin, it brings additional liquidity to bitcoin, and that is the more important piece of the equation for this asset.” 

Bloomberg Intelligence analyst James Seyffart said in an X post last week the SEC could allow options on spot bitcoin ETFs by the end of February. The regulator, however, could wait until as late as September to make a decision, he added.

Because the ETFs were approved and are already trading, the SEC doesn’t have a good legal reason to reject the applications, White argued.

He added: “Given it’s an election year, the SEC will probably not want to do anything controversial close to the election, so we tend to think we’ll get approvals sometime before summer.”

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