The Bitcoin options market: A first look at pricing and risk

ABSTRACT

This paper offers the first-ever look at Bitcoin options by investigating the wedge between optimum Bitcoin option prices based on classical option valuation models (Black-Scholes-Merton and the Heston-Nandi GARCH (1,1)) and actual premiums at which these options are trading. For this purpose, we use near-the-money call and put options traded on Deribit platform as on 27.01.2020, with the maturities ranging from January 31 to 25 September 2020. In addition, we analyse the risk inherent in Bitcoin options by calculating their Greeks and comparing them to those of traditional commodity options. Pricing results suggest slight overpricing and underpricing for Bitcoin call options with the strike $8,000 maturing on 30.01.2020 and 28.02.2020, respectively. We also find that the Bitcoin options provide much stable deltas over time compared to the other commodity options. This result implies higher insulation from undue price rises with the passage of time for investors in Bitcoin options. Our results are useful to regulators, investors and market managers in better understanding the nuances of the Bitcoin options market in addition to making more informed investment choices.

KEYWORDS:

• Bitcoin
• cryptocurrency
• European options
• option pricing

Acknowledgments

The authors would like to thank the Editor Mark Taylor and the anonymous reviewer. Their feedback and suggestions helped bring the paper to its current shape.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Based on Skew.com, a derivative tracking website.

² We corroborate our delta results with those of other bitcoin options with different strikes on Deribit.com (date of access 09/11/2020). We find that the value of delta varies significantly between 0.2 and 0.79, exhibiting a trend of increasing delta over longer maturity periods.

³ https://www.barchart.com/futures/quotes/KCZ20/volatility-greeks/dec-20, accessed 11 February 2020.

⁴ Closing prices come from Coinbase that accounts for the highest trading volume in Bitcoin, roughly 22.82% of market share.

⁵ www.fred.stlouisfed.org

⁶ Other GARCH models also have been tested, but AIC/BIC of the GJR-GARCH model derived relatively better results.

⁷ Other GARCH models also have been tested, but based on the AIC/BIC criteria, the GJR-GARCH provides relatively better results.

⁸ For Greeks on different commodity options, refer to excel file in supplementary material.