September 28, 2022

Ethereum gets a huge boost from a major market maker

Ether futures option trading has started for institutional investors who want a way to manage risk.

The CME launched ether options on September 12, ahead of the merger.

The merger is a major crypto event as it is a software update to the Ethereum blockchain, which is considered the internet of the crypto space. The merger is scheduled for September 15 and if no hiccups occur, a big step will be taken in the crypto industry to build trust among investors, crypto enthusiasts say.

The merger will impact the second-largest blockchain network by changing its transaction consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS), wrote Payal Shah, research director at actions and product development at CME Group.

Ethereum is home to over 3,000 decentralized applications, ranging from games to trading to lending. Various trends have emerged on Ethereum, such as initial coin offerings, decentralized finance, non-fungible tokens, and the metaverse.

Investors buy put options to protect against the downside and sell call options to earn additional income if they believe the upside is limited.

These new contracts offer an Ether futures contract with a size of 50 Ether per contract and based on the CME CF Ether-Dollar benchmark rate, which serves as the daily benchmark for the price of Ether in US dollars.

Ether options settle in liquid Ether Futures Contracts, which are based on the regulated CME CF Ether-Dollar benchmark rate. Micro-ether futures began trading in December 2021.

“We had strong interest from clients to have a larger contract size to have a better way of managing ether risk,” said Tim McCourt, Senior Managing Director, Global Head of Equity Products and FX at CME Group, at TheStreet. “Options are a very useful tool for Ethereum pre and post merging.”

Institutional clients wanted to use options alongside a larger ether futures contract, he said.

The CME began trading options on Ether futures at 6 p.m. ET on Sept. 11, and institutional clients made several large block trades, McCourt said.

“Larger contracts offer the possibility of having more price discovery, arbitrage opportunities and coverage of certain activities,” he said. “Institutional clients operate within regulated frameworks and want price transparency and the standard benefit of futures and options,” he said.

Institutional traders showed more interest in micro ether options than micro BTC options – during the third quarter, the number of micro ether options increased to 3,600 contracts per day from 600 in the second quarter while contracts micro BTC options were more muted with contracts rising to 600 in Q3 from 400 in Q2 per day.

One of the reasons there could be more ether futures trading is that the Ethereum network provides more organic needs for ether as decentralized products and services such as NFTs increase. and as ether volumes increase, there will be increasing risk management needs for doing business in powered protocols and functions. by the Ethereum network and associated Ether-based transaction fees.

“There will be more inherent risk management needs in blockchain projects as more players and protocols scale their use cases with more testing and development,” McCourt said. . “Ether is what powers this network and is becoming increasingly involved in blockchain technology, making it more and more of a commercial use case.”

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Options on ether futures and micro ether futures are merger independent since the exposure is synthetic. Derivatives provide synthetic exposure.

“Our new options contracts will also complement CME Group’s micro-ether futures contracts, which saw a 43% year-over-year increase in average daily volume,” he said. .

Trading in ether futures and micro-ether options has reached record highs, according to the CME.

The average daily volume (ADV) of ether micro options in August was over 5,260 contracts, up over 130% from July.

Open interest on micro-ether options hit a record 124,814 contracts on Aug. 30, while average daily open interest in August hit a record 75,959, up more than 135% since July.

The average daily volume of ether futures hit a record high of 7,042 contracts in the third quarter, up 52% ​​from the third quarter of 2021.

High inflation rates and the Federal Reserve’s aggressive rate hikes have increased the risk for crypto investors, so they need tools to manage it effectively, such as ether options, said Director Jodie Gunzberg. CEO of New York-based CoinDesk Indices to TheStreet.

“Options allow other investors to essentially purchase insurance for a fixed term to protect against the risk of loss beyond a defined tolerance,” she said.

If an ether investor decides they want to hedge against a potential loss from the Ethereum merger, options can help and if ETH rises, only the premium paid will be lost – as will insurance, said Gunzberg.

“To own a put is to buy insurance and to sell a call is to sell insurance,” she said.

“These options can also provide highly correlated loss protection for smaller digital assets in the smart contract platform industry, represented by the CoinDesk Smart Contract Platform Select Ex ETH (SCPXX) Indexfollowed by Grayscale® Smart Contract Platform Ex-Ethereum Fund (GSCPxE),” she says.

In addition to using risk management, options can be used to develop ETH trading strategies or allow investors to gain exposure “without entering the crypto spot market directly if they feel more at risk.” comfortable with the traditional tools they know,” Gunzberg said.

Investors can manage risk without derivatives by limiting position sizes or intentionally diversifying with low-correlation assets, she said.

“In crypto, as the market grows in the number of digital assets with different technologies and use cases, their performance by sector is variable with some uncorrelated industries to provide better risk-adjusted returns and potentially hedge against conditions. adverse macroeconomic events, which are now measurable by the CoinDesk Family of Market Indicessaid Gunzberg. “Idiosyncratic risk can play an important role in diversification, as we saw with the recent outperformance of ether versus bitcoin, driven by the merger that subdued macro headwinds.”

Strong demand for the ether options contract is expected, said Rob Strebel, relationship management manager for DRW, a Chicago financial services firm.

“Options are a critical part of the trading strategy deployed by Cumberland’s institutional counterparties, whether to hedge risk or gain exposure to the asset class without having it on their balance sheets,” did he declare. “CME Group has a proven trading and clearing infrastructure supporting the product and we are delighted to provide liquidity from day one.”