Spot BTC ETF options vs BTC options: a comparative guide

With spot Bitcoin ETF option volume levels reaching almost two billion dollars in notional value on its first day of being available, it's clear that options on BTC ETFs are gaining significant traction among sophisticated TradFi traders. While traditional Bitcoin options have been around for several years, the emergence of spot Bitcoin ETF options has brought a fresh perspective to the TradFi derivatives market.

Does the approval of spot Bitcoin ETF options signal a paradigm shift in the crypto derivatives market? To answer this question, we must delve deeper into the unique characteristics of both traditional BTC options and spot Bitcoin ETF options, along with their implications for traders.In this article, we'll explore the nuances of these two Bitcoin derivative products, exploring their key differences, advantages, disadvantages, and use cases. By understanding the intricacies of each, you can make informed decisions about which option aligns best with your personal trading strategy and risk tolerance.

TL;DR

• Spot BTC ETF options are tied to Bitcoin ETFs and offer TradFi traders a way to trade Bitcoin derivatives.

• Bitcoin options are directly tied to Bitcoin, offering higher volatility and potential rewards. They're ideal for experienced traders comfortable with risk.

• The key differences between spot BTC ETF options and Bitcoin options lie in trading availability, volatility, and overall access.

• Despite their differences, both types of options can be used for hedging, speculation, and diversification.

• Choosing the right option product depends on your personal risk tolerance, experience level, and trading goals.

What are spot BTC ETFs?

A spot Bitcoin ETF is an exchange-traded fund that allows traders to gain exposure to Bitcoin without directly owning the asset. Unlike futures-based Bitcoin ETFs such as the ProShares Bitcoin ETF, spot BTC ETFs directly track the price of Bitcoin through physical holdings of the asset. In a way, spot BTC ETFs simplify the process of gaining exposure to Bitcoin for traditional market participants through regulated, exchange-listed products.

The approval of options trading for spot BTC ETFs has allowed TradFi-inclined traders the opportunity to hedge or speculate using derivative contracts tied to these spot ETFs. From BlackRock's spot Bitcoin ETF (IBIT) to ones from Fidelity and Bitwise, traders have a number of choices when deciding how they want to gain exposure to Bitcoin, be it through shares of the spot BTC ETFs or options that are based on them.

Equating spot BTC ETF option strike prices to Bitcoin prices

One plus of having spot BTC ETF options now approved for trading on traditional exchanges is the ability to gauge the overall sentiment towards Bitcoin as an asset. Judging from current numbers, we can see that option traders are overwhelmingly bullish given that the put-call ratio sits at 0.28 at the time of writing.

What's even more interesting is that numerous IBIT calls with a $100 strike price that are expiring on December 20, 2024 have been purchased. With an open interest of 11,870 contracts and premiums that cost just $0.15 each at the time of writing, it's clear there are some option traders who are speculating on Bitcoin prices going to the equivalent of more than $175,000 by the end of 2024.

Although this might seem overly optimistic, it reflects the speculative nature of options trading and the market’s excitement around Bitcoin’s potential. Such activity not only highlights trader sentiment but also underscores how spot BTC ETF options can serve as a barometer for Bitcoin's long-term outlook.

What are Bitcoin options?

Like their spot Bitcoin ETF counterparts, Bitcoin options are financial derivatives that give crypto traders the choice to buy or sell Bitcoin at a specified strike price on a particular date. As a popular derivative instrument that's used for speculation and risk mitigation, sophisticated crypto option traders can craft personalized multi-leg option strategies that allow them to manage risk in highly volatile markets while maintaining BTC exposure. Such Bitcoin options are typically available on crypto options trading platforms like OKX that offer flexibility through various call and put contracts.

How do spot Bitcoin ETF options and Bitcoin options work?

Spot BTC ETF options function similarly to stock options. Each contract represents the right to buy or sell shares of the ETF at a specific price. For example, if you believe the ETF price will rise, you can purchase a call option. Conversely, a put option allows you to make gains if the ETF price declines. These contracts are then settled in cash or shares, making them an attractive option for traders seeking a regulated environment.

As for Bitcoin options, they provide a more direct connection to BTC itself. Unlike spot BTC ETF options, Bitcoin options on OKX are only settled in Bitcoin instead of stablecoins. This settlement feature caters to traders who are more directly involved in crypto markets and want to maintain direct exposure to Bitcoin.Settlement aside, both types of options are useful because they allow for hedging, speculation, and diversification.

• Hedging: Spot BTC ETF and Bitcoin options provide a risk management tool for traders holding Bitcoin itself or spot Bitcoin ETF shares. For instance, if you own shares and are concerned about potential price drops, purchasing a protective put option allows you to offset losses by locking in gains from the price decline of the shares. This strategy helps protect your overall holdings against adverse market movements.

• Speculation: By enabling traders to take positions based on their expectations of Bitcoin's future price movements without directly owning the spot asset or the ETF, out-of-the-money (OTM) spot BTC ETF options and BTC options allow speculation with a defined risk. For example, buying an OTM call option lets you capitalize on upward price movements with limited upfront capital.

• Diversification: For those looking to add Bitcoin exposure to their portfolios without directly engaging with the crypto markets, spot BTC ETF options offer a regulated product. These options diversify strategies by combining traditional finance mechanics with exposure to crypto assets, appealing to both retail and institutional traders. As for Bitcoin options, they add an extra dimension of Bitcoin derivatives to your holdings if you're purely trading spot Bitcoin. This sets up a more comprehensive trading strategy that can potentially increase your overall gains while managing your risk exposure effectively.

In conclusion, both spot BTC ETF options and Bitcoin options offer unique advantages and cater to different preferences. By understanding the key differences and benefits of each, traders can make informed decisions to optimize their trading strategies and maximize their potential returns.

Spot BTC ETF options vs BTC options: key differences

Now that you're familiar with both derivatives, let's look at what makes BTC options different from their spot BTC ETF options counterpart. We'll consider their differences at a glance before diving into key differences.

Underlying asset

The underlying asset of spot BTC ETF options is shares of the ETF which effectively track Bitcoin’s price without requiring direct ownership of the asset. In contrast, BTC options are directly tied to Bitcoin itself, meaning the contracts derive their value from BTC’s last-traded market price. This distinction is important because spot BTC ETF options appeal to traders who prefer exposure through a regulated financial product, whereas BTC options attract traders seeking direct engagement with Bitcoin’s price movements.

Market availability

Spot BTC ETF options are traded on traditional financial exchanges such as the NYSE, offering a familiar and regulated environment for traders transitioning from equities to crypto. However, BTC options are predominantly available on specialized crypto platforms like OKX. While these platforms cater to crypto-native traders, their market availability may be restricted in regions with stringent cryptocurrency regulations, potentially limiting access for some.

Regulation

Being subjected to strict regulation by financial authorities, spot BTC ETF options provide an additional layer of trust and transparency. This regulatory oversight makes them an attractive choice for those wary of the unregulated nature of crypto markets. On the other hand, BTC options can't be traded in geo-restricted environments where exchanges can't operate. Despite this, they may be preferred among those comfortable navigating crypto-native platforms.

Risk profile

The risk profile of spot BTC ETF options is generally lower due to their foundation in traditional financial markets and the regulated nature of ETFs. They appeal to traders seeking Bitcoin exposure while mitigating risks associated with direct crypto ownership. Conversely, BTC options come with higher risk due to Bitcoin’s inherent volatility, the potential for abrupt market swings, and the relative lack of institutional safeguards. However, the potential for higher rewards attracts experienced crypto option traders who are confident in managing this volatility.

Liquidity

Spot BTC ETF options benefit from higher liquidity as they're traded on established exchanges that attract a diverse range of participants. This high liquidity provides tighter spreads and better trade execution for those involved. In contrast, the liquidity of BTC options varies depending on the platform and market conditions. While leading exchanges do offer robust liquidity, smaller platforms may have thinner order books, leading to higher transaction costs and less efficient trading conditions for those choosing Bitcoin options.

Evaluating the risks of trading spot BTC ETF options and Bitcoin options

Trading spot BTC ETF options and Bitcoin options offers the potential for healthy gains. However, it's not without its risks. Understanding these risks is vital for developing sound trading strategies and managing exposure effectively.

Spot BTC ETF options risks

• Regulatory changes: Spot BTC ETF options are heavily tied to the regulatory landscape. As such, any policy changes can directly impact the performance and availability of these instruments. For instance, a government crackdown on cryptocurrency trading or ETF approvals may lead to reduced liquidity, higher compliance costs, or even the delisting of certain ETFs. These would ultimately disrupt options trading for these spot BTC ETFs.

• ETF tracking errors: Even though spot BTC ETFs are designed to closely track the price of Bitcoin through physical holdings, they may not perfectly mirror Bitcoin’s price movements. Factors such as management fees, custodial risks, and inefficiencies in rebalancing could create tracking errors, causing the ETF’s value to deviate from the actual price of Bitcoin. This seemingly minor difference may lead to challenges in accurately pricing options contracts, potentially eroding gains for option traders who are trading with size and are relying on precise correlations.

• Market sentiment and news sensitivity: Spot BTC ETFs and their associated options are influenced by broader market sentiment. News about regulatory decisions, institutional adoption, or macroeconomic conditions can drive rapid price changes in ETF shares and their options. This adds an additional layer of unpredictability, especially for short-term traders who are scalping or trading on a shorter time frame.

Bitcoin options risks

• High volatility: Bitcoin's inherent price volatility is a double-edged sword. While it creates opportunities for significant gains, it also makes Bitocin options trading particularly risky. Even small price fluctuations can lead to dramatic changes in an option's value, especially for contracts close to expiration or those with high leverage. Traders who don't employ risk mitigation strategies may face substantial losses.

• Thin liquidity: Compared to traditional financial markets or even spot BTC ETF options, the Bitcoin options market offers thinner liquidity. This illiquidity can result in wider bid-ask spreads, making it more expensive to enter or exit positions. Additionally, low liquidity can exacerbate price slippage and impact overall gains.

• Counterparty risk: In the crypto scene, Bitcoin options are sometimes traded on less-regulated crypto exchanges, introducing heightened counterparty risk. Traders face the possibility of default by exchanges or intermediaries, especially those with a poor reputation or weak regulatory oversight. This is a significant concern in cases where exchanges hold user funds without robust security measures, exposing crypto option traders to potential losses from hacks or mismanagement.

Key considerations for risk management

To mitigate these risks, traders should adopt robust risk mitigation strategies to make sure they're not over-extended. Here are some suggestions for each instrument.

• For spot BTC ETF options: Choose ETFs with a strong record of tracking Bitcoin accurately and those that are operated by reputable financial institutions. Additionally, you should monitor regulatory developments and diversify exposure across multiple ETFs to reduce reliance on a single product.

• For Bitcoin options: Use platforms with strong liquidity and regulatory compliance. To avoid getting bad fills, size in with smaller trades or use market orders to avoid slippage in illiquid markets. For those experienced with multi-leg options, employ advanced spreads to hedge against volatility and make sure of a balanced risk-reward profile.

Which is right for you? Spot BTC ETF options vs BTC options

Now that you're familiar with the rewards and risks associated with each type of derivative, let's narrow down which instrument might best suit your trading style, experience level, and financial goals.

Consider spot BTC ETF options if:

• You're transitioning from traditional markets: If you’re a TradFi trader accustomed to regulated environments and conventional financial instruments like stock options, spot BTC ETF options offer a familiar introduction to Bitcoin-related derivatives. These options provide exposure to Bitcoin’s price movements through a framework that aligns with what you may be used to.

• Regulation is a priority: Spot BTC ETF options are tied to ETFs approved and managed by well-established financial institutions, ensuring compliance with strict regulatory standards. This makes them ideal for risk-averse traders who prioritize safety and transparency.

• You want lower volatility: Since spot BTC ETFs track Bitcoin indirectly through an ETF structure, they tend to experience less pronounced price swings compared to direct exposure to Bitcoin, making them a more stable choice for conservative traders. Additionally, since spot BTC ETFs are only traded during regular U.S. trading hours, ETF prices won't be impacted by weekend volatility.

• You're seeking diversification: Spot BTC ETF options are a great way to add Bitcoin exposure to a broader portfolio without directly holding BTC, especially for those looking to balance crypto risk with traditional assets.

Consider BTC options if:

• You’re an experienced crypto trader: If you’re already comfortable navigating the crypto markets and have a solid understanding of options strategies, BTC options provide greater flexibility and the potential for larger returns due to their direct correlation with Bitcoin's price.

• Volatility excites you: Bitcoin’s notorious price volatility can work to your advantage with BTC options. These instruments allow you to capitalize on rapid price movements, whether through speculative trades or hedging strategies.

• You prefer higher leverage opportunities: BTC options often come with greater leverage potential compared to spot BTC ETF options, enabling you to amplify gains with smaller initial capital. However, this also increases risk, making it more suitable for crypto option traders with high risk tolerance.

• You want to trade on crypto-native platforms: BTC options are widely available on specialized crypto exchanges, offering access to popular features like perpetual contracts, altcoin options, and multi-leg strategies tailored for the crypto-savvy.

The future of spot BTC ETF options and BTC options

The future of spot BTC ETF options and BTC options is poised for significant growth as the crypto scene matures and regulatory frameworks evolve. Spot BTC ETF options backed by institutional giants like BlackRock and Fidelity are expected to attract a broader range of traders seeking exposure to Bitcoin through popular ETFs like IBIT and FBTC. This could lead to increased liquidity and greater acceptance of crypto-based financial instruments in mainstream markets as IBIT and FBTC options draw in crowds of traders.

Meanwhile, BTC options could continue to thrive among crypto-native traders, driven by innovations on decentralized exchanges and the growing popularity of multi-leg strategies tailored for volatile markets. As blockchain technology advances and adoption widens, both instruments are likely to see enhanced trading tools, tighter spreads, and improved accessibility, creating new opportunities for retail and institutional participants.

Final words and next steps

While BlackRock's IBIT ETF options draws in record trading volume and cause some beginner option traders to feel FOMO, it's key to consider that both spot BTC ETF options and BTC options objectively offer unique advantages and challenges. While spot BTC ETF options provide a regulated and accessible gateway to Bitcoin, traditional BTC options offer unparalleled opportunities for high-stakes trading. Understanding their mechanics and use cases is crucial for making informed trading decisions. Ultimately, your choice will depend on your trading goals, risk tolerance, and familiarity with derivatives trading. For many traders, a balanced approach of leveraging multiple instruments can provide the best of both worlds, allowing for diversification while maximizing gains.

Interested in giving options trading a go? Check out our Bitcoin options offering to begin. For more on trading strategies involving BTC options, our guide to multi-leg crypto option strategies will be perfect for getting you started.