CME Group adds ETH options to growing crypto derivatives portfolio

The Chicago Mercantile Exchange has announced the launch of a new ETH-based options product ahead of the merger.

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 US, 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, provides liquidity. Genesis, a company specializing in digital currency trading, loans and transactions, will provide ether options contracts to its clients.

In August, CME Group launched two types of derivative products, euro-denominated bitcoin and ether futures contracts, designed to help institutional investors reduce risks associated with the volatility of cryptocurrencies, McCourt said at the time.

Looking to take advantage of the ETH price increase

The launch of ether options comes as ether prices have risen by 10.3% since the start of the Ethereum merger on September 6, 2022, with the Bellatrix upgrade and the latest mainnet shadow fork published on September 9, 2022. The launch is “well-timed”, believes McCourt.

Conversely, the futures products were released when bitcoin prices crossed the $19,000-$20,000 mark. The Ether price was just over $1,500, with both cryptoassets down over 60% since their peaks in November 2021.

There are two types of option contracts. A call option is opened to buy an underlying asset at a so-called strike price within a set period. Should the price of the asset increase, the buyer can purchase 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 certain price, say $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 declines when the call option expires, the investor loses his original investment. For a put option, if the asset price rises above the original investment when the contract expires, the investor loses his original investment, also called a premium.

In CME’s new product, the underlying asset is one ether futures contract, size of 50-ETH per contract. The contract uses the CME CF Ether-Dollar Reference Rate to set the price of ether.

Derivative products often come with high leverage, which increases liquidation risk

Derivative products are often combined with high levels of borrowing to magnify returns to investors and have traditionally been the playground of professionals rather than retail developers. Futures and options allow investors to put up only 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 act as retail brokers, they can open up the derivatives market to retail investors through strategic acquisitions. By acquiring derivatives exchanges that already have a futures commission merchant license, exchanges like Coinbase and FTX can build retail in lucrative derivatives markets.

CME Group accounted for 4% of global crypto derivatives trading in January 2022.

Previous launches have not been positive

Derivative product launches by CME Group have historically been accompanied by spikes in corresponding asset prices. When the market launched its first bitcoin futures product back on December 17, 2017, bitcoin hit an all-time high of $19,423.58, while ETH rose to $728.70, part of an upward trajectory that would see it reach a record high of $1,448.18. on Saturday, January 13, 2017. Following the launch of the ProShares bitcoin Exchange-Traded Fund on October 19, 2021, a product based on CME’s bitcoin futures, ETH rose from $3,752.62 on launch day and by Nov. 10 , had reached an all-time high of $4,878.26. Bitcoin continued its rise on launch day, eventually reaching an all-time high of approximately $69,000 on November 10, 2021.