Up until now, people have had one of two ways to get involved with the crypto market. You can own crypto that you gather by mining the coins or you could buy them. A few months ago, people were enabled to take exposure to bitcoin by buying or selling a Futures contract. Now it looks like there is a third option, options.
Ledger X is a trading and clearing platform. They describe themselves as a CTFT-Registered Swaps Execution Facility (SEF) and a Derivatives Clearing Organization (DCO). The niche they have chosen to address is the custody and trading of crypto-currency derivatives.
The company focuses on the institutional markets and they claim to clear fully collateralized bitcoin swaps for physical delivery. What we find particularly interesting this the company’s savings product. They call it LedgerSavings. The company hopes to deliver 16% annualized returns with a covered call strategy. The options used in the strategy are already traded on the company’s exchange.
The company is not really doing anything new. People deposit their bitcoin into an account with the firm. They then allow people to sell call options against the bitcoin they have on deposit. The options available have expirations of 3, 6 and 12 months.
The best we can tell, the implied volatility on bitcoin options fluctuates from 80% to 120%. So the price of bitcoin options will be quite high. Assume the following:
Price of Bitcoin = $8,500
Strike Price = 8,500
Time to Expiration = 1.0 years
Implied Volatility = 80%
Then the price of a 1 years call option theoretically is $2,700 and this price is within the Bid/Offer spreads quoted on their website. With premiums like this, we think there will be many people who will be willing to write call options against their bitcoin holding as a way of making money aside from hoping the price rises. What is less clear is the willingness of speculators to buy the options. At this point in time, it looks like open interest across all strike and expiration is somewhere around 3,000 contracts.
We will continue to investigate the infrastructure for trading crypto and options on crypto. It is clear that liquidity is a big issue at the moment because we notice that bid/offer spreads can be 10 to 20% wide, which we think is too large. It seems to us that only market makers with deep pockets will prosper in the near term. But, we think the day will come when trading bitcoin options may have potential. Until then, we will watch how the market develops.
