Search
  • Ben Upward

CME goes big with micro options...

A quick note on our experience this month trading the newly listed CME BTC and ETH micro futures options. We may write a larger piece or possibly a series of smaller posts laying out the time line of CME cryptocurrency products and where they fit in the broader, global crypto derivatives space. But for now, let's keep it simple...


This is not trading or investment advice nor a recommendation on anything discussed in this post. The information we are presenting are true and accurate to the best of our knowledge but these are relatively new products and we may have missed something or gotten something wrong - please consult with your advisor, IB or FCM before trading derivatives. Also check the CME website.


For context, Synchronicity is a Commodity Trading Advisor (CTA) and Commodity Pool Operator (CPO), and, together with its portfolio management team, has traded listed futures across every asset class. Synchronicity was one of the first shops to run a diversified digital asset fund and also one of the earliest firms to trade CME listed BTC futures, BTC futures options, and ETH futures - both on the screens and via block trades.


Just in the last month or so, CME launched listed options on the BTC and ETH micro futures. The micro futures themselves were announced in May of last year (2021). Because, originally, there were no options on these micro futures (and to a lesser extent because they were almost too small), we had paid little attention.



BTC futures - 1 contract = 5 bitcoin

BTC micro futures - 1 contract = 0.1 BTC


1 'big' contract = 50 micro contracts


ETH futures - 1 contract = 50 ETH

ETH micro futures - 1 contract = 0.1 ETH


1 'big' contract = 500 micro contracts



BTC futures options - 1 contract = 1 BTC future (which equals 5 bitcoin)

Expiry Last Friday of the Month

BTC futures micro options - 1 contract = 1 BTC micro future (which equals 0.1 bitcoin)

Expiry Last Friday of the Month

Week 1, Monday, Wednesday and Friday

Week 2, Monday, Wednesday and Friday

Week 3, Monday, Wednesday and Friday

Week 4, Monday, Wednesday and Friday


ETH futures options

There are no options on the 'big' ETH contract

ETH futures micro options - 1 contract = 1 ETH micro future (which equals 0.1 ETH)

Expiry Last Friday of the Month

Week 1, Monday, Wednesday and Friday

Week 2, Monday, Wednesday and Friday

Week 3, Monday, Wednesday and Friday

Week 4, Monday, Wednesday and Friday


It is early and some of the information below may change if the micros attract more volume and become more popular. It is also important to note that some market participants enjoy smaller exchange fees and commissions - but our guess is that despite the level of fee, the relationship between different contracts should be more or less proportional. Finally, to reiterate, this is an extremely small sample size and is meant really to act as an initial recording of what we've seen to help us chart the progress of these contracts as we move forward in 2022.


We traded both BTC and ETH futures micro options this month and here was our experience:


Spreads (distance between the bid and offer)

BTC micro option monthlies - wider than the 'big' contract options - but not by much

BTC micro option weeklies - wider than the 'big' contract and slightly wider than the monthlies - but not by much

ETH micro option monthlies - about the same on a relative basis as the BTC micro option monthlies


Size quoted

BTC micro option monthlies - usually somewhere between 50-200 contracts showing across the 1st two levels of market depth - so the equivalent of 1 to 4 'big' contracts - a little bit less than what we typically see for the 'big' options contracts but not too bad.

BTC and ETH micro option weeklies - we have only looked a handful of times but typically we have been seeing 50 contract type size in both - for BTC that means the equivalent of 1 'big', for ETH it is only 10 ETH worth (of 1/10th of a 'big'). So this is small size.


Cost and trade examples


(We'll focus mostly on exchange fees, add commissions in at your own rate)


BTC Monthlies:


BTC 'big' options - exchange fee $5.00/contract.

BTC micro options - exchange fee $1.60/contract,


Now, if a market participant wanted to buy 50 micro options instead of 1 'big' option (say so they had the granularity to get out of half of that position on a large move), the exchange fees alone would be $80 vs $5 per half turn (i.e. per trade).


Let's track a small trade example and a big trade example to put the fees into context:


Small micro trade:

Current price of BTC = $42,500 - pay (buy) $205.50 for 1 April $43,500 strike BTC micro monthly call option (expires 4/29/2022)

- notional value of trade at the strike price = $4,350

- premium paid $205.50

-break even = (43,500+2055+1.60) $45,556.60 or 7.19% move from $42,500.

The $1.60 plus commissions (let's say $2 for this half turn) - so $3.60 total - is high at 1.75% of premium paid.

Every $1,000 movement in BTC is $100 worth of P&L above the strike price (before costs).


Larger micro trade:

Current price of BTC = $42,500 - pay (buy) $205.50 for 50 April $43,500 strike BTC micro monthly call option (expires 4/29/2022)

- notional value of trade at the strike price = $217,500

- premium paid $10,275

-break even = (43,500+2055+80.00) $45,635 or 7.38% move from $42,500.

The $80 plus commissions (let's say $2 for this half turn) - so $180 total - is high at 1.75% of premium paid, but, if granularity is important to the trade, may still be acceptable.

Every $1,000 movement in BTC is $5,000 worth of P&L above the strike price (before costs).


Now compare large micro trade to large 'big' contract trade:


Current price of BTC = $42,500 - pay (buy) $2025 for 1 April $43,500 strike BTC micro monthly call options (expire 4/29/2022)

- notional value of trade at the strike price = $217,500

- premium paid $10,125

-break even = (43,500+2,025+5) $45,530 or 7.13% move from $42,500.

The $5.00 plus commissions (let's say $2 for this half turn) - so $7 total - is reasonable at roughly 7 basis point of premium paid .

Every $1,000 movement in BTC is $5,000 worth of P&L above the strike price (before costs).


ETH Monthlies:


ETH micro options - exchange fee $1.60/contract.


Now, if a market participant wanted to buy 500 micro options instead of what 1 'big' option would be if it existed (say so they had the granularity to get out of half of that position on a large move), the exchange fees alone would likely be $800 vs $5 per half turn (i.e. per trade)!


Weeklies:


BTC micro options - exchange fee $0.20/contract


So to compare it to 1 'big', 50 micro contracts would cost $10 instead of $5.


(we haven't traded ETH weeklies yet so we will update next time we post on this)



Notional Value


Notional value (with BTC at say $42,000) of 1 'big' contract = ~$210,000.

Notional value (with BTC at say $42,000) of 1 micro contract - ~$4,200.

Notional value (with ETH at say $3,200) of 1 micro contract - ~$320.



Conclusion


There is limited data and these are just initial impressions but here are our takeaways for the new BTC and ETH micro options:

  • Spreads are not too much wider than 'big' contract BTC options - this goes for monthlies and weeklies

  • Size quoted on the screen is okay for BTC micro monthlies and weeklies but is very low for ETH micro options

  • Hopefully the block market will provide more liquidity until the screens get more participants

  • Cost (exchange fees) are:

  • high for BTC monthly micro options

  • fairly reasonable for BTC weekly micro options

  • extremely high for ETH monthly micro options

  • Notional values

  • Definitely geared toward retail traders/investors

  • BTC micros can still be somewhat useful for professional traders but an e-mini version (at 1/5th the size of the 'big' contract) might be preferable

  • The ETH micro notional value is almost too low (in our opinion) and therefore the fees might prove to be somewhat of a challenge

The launch of the cryptocurrency micro futures and the options on those instruments is a move by CME to:


a) address the notional size of the 'big' contracts becoming too large and lacking granularity to trade positions and,

b) attract retail traders in to the space with smaller, lower-dollar-premium instruments and,

c) mimic some of the offshore exchanges weekly listing cycles for options to pull trading volume market share into the US.


We think this is a good first step. With more time and data points we will be able to see how the market reacts to these new products. CME will soon be facing more competition with FTX, Crypto.com, Bitnomial and Coinbase all joining the fray to properly access US derivatives customers - FTX's margin proposal alone could be a game changer, more on that in a future article/post.

28 views0 comments

Recent Posts

See All