The Chicago Mercantile Exchange has announced the launch of a new ETH-based options product ahead of the Merge.
According to Tim McCourt, Global Head of Equity and FX products, interest in ether derivatives is booming. The exchange, one of two licensed to operate in the U.S., is already seeing a 43% increase in daily trading volume compared to last year.
Cumberland, the digital asset division of DRW, a principal trading firm based in Chicago, is providing liquidity. Genesis, a company specializing in digital currency trades, loans, and transactions, will give the ether options contracts to their clients.
In August, the CME Group launched two types of derivative products, euro-denominated bitcoin, and ether futures contracts, designed to help institutional investors mitigate risks associated with the volatility of cryptocurrencies, McCourt said at the time.
Looking to capitalize on ETH price increase
The launch of ether options comes as ether prices are up 10.3% since the start of the Ethereum Merge on Sep. 6, 2022, with the Bellatrix upgrade and the last mainnet shadow fork going live on Sep. 9, 2022. The launch is “well-timed,” McCourt opines.
Conversely, the futures products were released when bitcoin prices were skirting the $19,000-$20,000 mark. The ether price was a tad over $1,500, with both crypto assets down over 60% since their Nov. 2021 highs.
There are two types of options contracts. A call option is opened to buy an underlying asset at the so-called strike price within a fixed period. Should the price of the asset increase, the buyer can buy the asset at the strike price and sell it to generate a profit. An investor with a put option to sell an asset at a specific price, say at $100, has the chance to sell the asset if the price falls to $80, pocketing the profit.
In the case of a call option, if the asset price decreases when the call option expires, the investor loses their initial investment. For a put option, if the asset price rises above the initial investment when the contract expires, the investor loses their initial investment, also called a premium.
In CME’s new product, the underlying asset is one ether futures contract, sized at 50-ETH per contract. The contract uses the CME CF Ether-Dollar Reference Rate to set the price of ether.
Derivatives products often come with high leverage, increasing liquidation risk
Derivative products are often coupled with high levels of borrowing to magnify returns to investors and have traditionally been the playground of professional rather than retail developers. Futures and options allow investors only to put up a small fraction of the value of a deal.
Coinbase recently launched its nano bitcoin-futures product to enable investors with shallower pockets to invest in derivatives without the risk of liquidation that comes with highly-leveraged trading.
Because crypto exchanges function as retail brokers, they can open up the derivatives market to retail investors through strategic acquisitions. By acquiring derivatives exchanges already possessing a futures commission merchant license, exchanges like Coinbase and FTX can build retail beachheads in lucrative derivatives markets.
CME Group accounted for 4% of crypto derivatives trading worldwide in Jan. 2022.
Previous launches have not been bullish
Derivative product launches by CME Group have historically been accompanied by peaks in corresponding asset prices. When the marketplace launched its first bitcoin futures product back on Dec. 17, 2017, bitcoin hit an all-time high of $19,423.58, while ETH rallied to $728.70, part of an upward trajectory that would see it hit an all-time high of $1,448.18 on Saturday, Jan. 13, 2017. Following the launch of ProShares bitcoin Exchange-Traded Fund on Oct. 19, 2021, a product based on CME’s bitcoin futures, ETH rallied from $3,752.62 on the day of the launch and, by Nov. 10, had reached an all-time high of $4,878.26. Bitcoin continued its upward rally on the day of the launch, eventually hitting an all-time high of roughly $69,000 on Nov. 10, 2021.