Diminishing returns on trades like spot futures Selling cryptocurrency options is profitable?
The digital currency options market is booming and has started to shake up the entire digital currency trading market.
Forget Musk’s tweets, regulatory news and Bitcoin’s energy consumption. For hedge fund manager Shiliang Tang, the biggest cryptocurrency event of the year is happening around the corner: the digital currency options market is booming and has begun to shake up the entire digital currency trading market. Tang is printing money with digital currency derivatives trading through his $130 million fund, LedgerPrime, which is filled with former Wall Street bigwigs from Virtu Financial Inc. and Cantor Fitzgerald LP.
Bank of America and UBS AG alum are also making markets in options markets and running quantitative strategies such as price arbitrage and trending strategies on multiple digital currency exchanges. The return: His flagship fund has returned 78% this year. “Given the inefficiencies in the market, the opportunities seem greater,” the chief investment officer said in an interview in Miami. “There’s a lot of innovation and new products being launched in the crypto space.”
The cryptocurrency options market has seen explosive growth this year Monthly options trading volume (USD)
The integrated crypto derivatives market is becoming larger, more liquid and more influential due to the huge demand for leverage and hedging strategies. Despite recent heartbreaking volatility and declines, Bitcoin has risen approximately 250% over the past year, with a proliferation of new trading venues, from DEFIs to futures, used to fill the insatiable demand for trading. Just to reference the options market. Last month, Deribit, the largest options exchange, averaged $1.4 billion in daily trading volume, an increase of nearly 13 times over 2020.
Positions in bitcoin contracts total $7 billion. A growing number of money managers and retail investors are selling cryptocurrency options to generate revenue – a common strategy for mainstream assets and a sign of the industry’s rapid growth. In addition to more specialized trading venues like Cryptocurrency, Firecoin and LedgerPrime’s sister company LedgerX, the world’s largest derivatives exchange, CME, has active cryptocurrency options trading. Even Goldman Sachs Group is considering entering the ethereal derivatives space.
For critics, this is a completely glorified and largely unregulated casino with little real-world utility that could easily collapse – a new threat that Chinese regulators are actively curbing. In Tang’s telling, however, the industry bears many similarities to Wall Street. Proven trading strategies in stocks and bonds are becoming increasingly popular in the cryptocurrency space. Like traditional market makers, Tang’s firm posts buy and sell quotes on options exchanges and profits from the spreads, which tend to be larger in more volatile assets (like BTC or ETH).
Of course, this is still cryptocurrency – the wild, wild west. Traders may simply not be able to replenish their margin in time before being forced to close. And there’s no central clearing house, so LedgerPrime needs to manage its positions on each exchange separately. All of this helps explain why bitcoin has plummeted over the last month. “They don’t take their time liquidating your positions – they basically just sell or buy your leveraged positions at market price and hit the entire order book directly.” Tang had this to say about cryptocurrency exchanges. deribit bitcoin iv implied volatility
For many, frenzy is part of the appeal of cryptocurrencies. New products emerge so quickly that even as the inefficiencies of one are slowly optimized, another soon reappears on one of the hundreds of exchanges. All of these opportunities are attracting a more specialized crowd, with institutional investors sometimes representing about 80% of Deribit’s traffic. A popular trend at the moment is selling options, betting that the realized volatility of cryptocurrencies will be lower than market pricing.
Since this is similar to earning a premium on an insurance order, it can be hugely profitable – but also means huge risk – for an asset like bitcoin. the 30-day implied volatility of BTC, a key variable in options pricing, is about 100 at the moment and has spiked to 165 in the last month’s decline, Deribit says. the S&P 500 index The implied volatility for the S&P 500 is around 18 at the moment. Selling cryptocurrency options has proven particularly lucrative as returns from trades such as spot futures have diminished.
Luuk Strijers, Deribit’s chief commercial officer, said, “Options strategies become even more important when these alternatives [spot futures] lack interesting returns.” The result of all this is that options trading is getting large enough to influence spot prices. Traders like LedgerPrime also buy cryptocurrencies to hedge their own (options positions) exposure – further adding momentum to the market’s spikes and plunges, causing a Gamma squeeze.Tang’s tip: Every Friday in New York around 4 a.m., when most options contracts expire Keep a close eye on spot price volatility. “Options flows will definitely drive some short-term price action,” Tang said. “But in the long run, prices are still about supply and demand.”
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