Falling implied volatility and loosening market conditions, such as a crypto-friendly Trump administration, are driving broader institutional interest in crypto derivatives, says Cboe Global Markets Nishank Modi.
In the latest instalment of the Vol Show, Trader TV speaks to Modi, senior director at Cboe and Peter Chen, founder and chief information officer at Riverside Blockchain, about where they are seeing appetite for institutional exposure to listed digital assets—including Bitcoin index options and crypto exchange-traded funds.
Interview
Etienne Mercurali – First question, please, Nishank, would you present to us the listed derivatives Cboe (Global Markets) offers?
Nishank Modi – It’s a great question. Etienne. Just as background, I work at Cboe in the product team. It’s a team called Cboe Labs. You know, we really work on creating new products for the markets, right from zero DTE options to dispersion variants, and more recently, crypto. Bitcoin, Ether, this is all stuff that we’ve been looking at and it comes directly as a result of market feedback. Our clients tell us we were more interested in these products. We want listed access to these products. So that’s what we start looking at. In the crypto space specifically, you know, we started noticing some challenges for our traditional client sets. There are limited institutional create Bitcoin Options or Futures, right? The direct access to these products is really hard. There’s fragmented liquidity across so many different sources, and just the need to have these standardized risk management tools. So that’s where Cboe steps in and says, what we will create an index option, which is really what we’re known for, right? We’re known for our SPX and VIX franchise, which are index options. And we say we’re going to create index options that can do all of these things. You know, we’ll create a regulated cash settlement index option that has exposure to spot Bitcoin. It’s going to trade the way in most options in the US trade cleared through the OCC. Our methodology is we take the 10 or 11 most liquid ETFs, that track spot Bitcoin. We combine them into an equal-weight index. We call this index a CBTX index, Cboe, Bitcoin, US ETF index, and we launched options on these. One of the feedback that we got from our clients was that this is a fairly large index, and they love the fact that it’s large in size and notional for institutional clients, but at the same time, they wanted something which is slightly more nimble also. So we also launched the 1/10th of this, the mini index that’s called MBTX. And between MBTX and CBTX, what Cboe then offers is a way for institutional and retail clients to access options on Bitcoin, on spot Bitcoin. These options are currently offered as third Friday options and end-of-month options. And a large number of people who’ve adopted these options have been the ETF community. So these are ETF providers that want to provide access to their clients to options-based strategies on Bitcoin, and they use MBTX and CBTX as the constituents of their ETFs in order to provide the buffer strategies, or the income strategies, all the different vehicles that you know retail clients and traditional clients want in this market.
Etienne Mercurali – Peter, if I come to you, you run a successful crypto fund. As a crypto native, do you use derivatives? Do you use derivatives trading cryptos?
Peter Chen – Yes, in a limited role. So crypto native investors mostly use derivatives to take on leverage. We don’t use options very much. Historically, options were not very accessible, and they’re hard to learn. And there are a lot of crypto natives like me who do not come from a Wall Street or trading background. So the derivatives product that we mostly use is perpetual futures or Perps. It’s very simple to use. You can lever up 5x 10x 100x if you want, and it’s very accessible. And that’s where things get dicey, because you’re taking a very volatile asset and you’re adding leverage to it, and that’s not a great combination. So I tend to use leverage very sparingly. I mean, this is an industry where gains can compound like crazy over time. I first started investing in crypto in 2017 and Bitcoin is up 35x since then. Ethereum is up 100x since then, I want to capture those long-term gains and not blow up in the process. And there’s a lot of cautionary tales out there of people who blew up, right? People using 2x leverage, and they got liquidated in March 2020, because Bitcoin dropped 50% in one day. So imagine being a crypto investor, being bullish. You blow up during the Covid crash, and you miss out on the 2020, 2021 bull market. That’s got to be horrible. So use derivatives for hedging, for arbitrage, what have you, but be careful with leverage.
Etienne Mercurali – Suppose everybody wants to be Michael Saylor and micro strategy for good or worse. I suppose one thing I’ve noticed, and you can both comment on that, is the volatility and implied volatility coming down a lot since the beginning of the year and the coming of all these institutions to listed products. Maybe it’s the time to level up or use options to try the risk out.
Nishank Modi – Nishank, great question, right? It’s, it is something that has moved so distinctly right the implied vol in Bitcoin options. That even people who don’t generally follow options or volatility, they’ve been talking about this, like what has led to the fact that implied vol have collapsed in an asset class that is known to be volatile. So as context, implied vols on Bitcoin options, the add-the-money levels right, which is roughly what you would use as a benchmark. We’re roughly marking at about 60 to 65, about six months ago, even a year ago. And if you go back further from there, it was higher than that, 80 or 100 implied vol. If I look at implied vols today on the listed option space, they have crashed from 65 earlier in the year down to 31 or 32 right now. So you know, crashed by 50%, that’s a fairly large drop. If I look at realized volatility, which is just, what is bitcoin doing? How much is it actually moving over time? I don’t see massive changes in that. So I’m not seeing, you know, I’m not seeing Bitcoin as an asset class become less volatile. What I am seeing is options on Bitcoin become less volatile. And there’s a few reasons for this. Part of it is it’s a maturing market, as more and more players come in both institutional and retail, but even to a greater extent, the institutional space right as they adopt more and more Bitcoin holdings, and as it becomes a popular choice of corporate treasuries, as they start, you know, buying Bitcoin. There’s a little bit of a downward effect that takes place on the implied vol side. The second thing that’s also happening is, as people are long Bitcoin, as more and more people now have a stock of Bitcoin that they own, they’re looking to monetize that. The way to monetize that is usually by selling an upside call, or by selling volatility in some form. There’s a lot of ETFs, like I mentioned earlier, that do this, and that, in effect, is a net negative effect on implied vol. I think a combination of those two factors is leading to implied vol being fairly low. You know, the beauty of listed markets is it is a two-sided market that’s accessible to everyone. So if clients as a whole, if the market as a whole thinks it’s too low, right, they would come in and start buying it, right? And the numbers that we see now, the equilibrium that we see that is set around the low 30s, is where both buyers and sellers feel comfortable exchanging or trading with each other, right? So, you know, in my personal capacity, I think maybe vol is a bit low, but the market is telling us that, you know, this is where, as a whole, the market seems to think where the Bitcoin vol should be.
Etienne Mercurali – What’s your take, Peter,
Peter Chen – I think Nishank is absolutely right. Crypto has matured a lot over time, and just taking a historical perspective, it’s just a much bigger asset class, and the participants are more institutional. And what that means is it dampens volatility. It means it takes more time and more money to move the market significantly. So let me give you two examples of where Bitcoin doubled in price. So the first example is from December 2017, Bitcoin went from 10k to 20k in the span of a month, and the only catalyst was the launch of Bitcoin futures in the US. A second example, Bitcoin doubled last year from 50k to 100k. It took about a year, and the catalysts were numerous. The approval of spot Bitcoin, ETFs much higher than expected, inflows, the rise of MicroStrategy and copycats, and the election of Trump, who loves crypto. So it took all that just for Bitcoin to double. So yeah, Nishank is absolutely right, crypto has matured and its less volatile.
Etienne Mercurali – What I’d like is to find a way to bridge the listed and the crypto native. What are you planning for the future on Nishank?
Nishank Modi – Yeah, it’s a great question. I mean, we’ve, you know, we’ve done a lot of work on Bitcoin, as I just mentioned. You know, we’re exploring Eth, and we’re seeing if Ethereum is, is a possible next spot for us. You know, we’ve also got futures on both Bitcoin and Eth, as we speak, right? So these are futures under different jurisdictions. They clear CFE, which is the Cboe’s futures exchange, and to the extent that people want margin futures on Bitcoin or Ether, they have access to this. We’ve been in close contact with pretty much the entire ETF community, and we’re really listening to their demands. They love flex options, for example, and they use flex options on the indices on MBTX and CBTX to create these novel solutions for clients. So we’re listening to the flex community and to all of the leaders from that industry, and saying, Okay, what is it? What else can we do for you, right, that can help you cater to clients, right? Can we create a new ETF? Can we create a new index? Can we create more more kinds of options or order types that help you better service your clients.
Etienne Mercurali – And Peter, what’s your ask? What would make you interested in listed derivatives?
Peter Chen – Yeah, so I think there’s a real opportunity here for crypto options to take more market share, because Perps right now are about 30 to 40 times bigger than crypto options, and I think if options became more accessible to crypto native investors, that would be a big help. Crypto native investors have most of their money on chain, not in a brokerage. So you either got to make it easier to trade options on chain or reduce the friction of moving money back and forth between on chain and a brokerage. And I’d also love to see just better hours, because these crypto native investors are used to trading 24/7, and if you tell them, hey, you can only trade during these set trading hours, that’s going to be be a big ask.
Nishank Modi – Peter, that’s a great point. It’s, it’s, it’s something that’s been raised to us by our clients consistently, right? The fact that, you know, crypto trades 24/7. Can we have listed products that match that? And really, the answer is, we’re exploring it. We’re seeing how much of that can we do? If I’m being honest, I don’t think 24/7is our first goal, but if we can get extended trading hours, or global trading hours, or you know that translates to is, roughly speaking, 24/5 on the option side, that would be a great thought for us. But you know, all of these things depend on having the right regulatory framework in place and getting the right approvals. So no promises, but all I’d say is, we’re looking at it. I think that
Peter Chen – Would help a lot, just because a key difference between options and perps is you can’t get liquidated on options. They can expire worthless, but you’re not going to get liquidated on a 5% move. So yeah, I’d love to see options get bigger.
Nishank Modi – Noted and thank you
Etienne Mercurali – For my part, I would like to thank you both for your insights today. Thank you Peter, thanks for having me and Nishank.
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