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

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  • Akanksha Jalan
  • Roman Matkovskyy
  • Saqib Aziz

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.

Suggested Citation

  • Akanksha Jalan & Roman Matkovskyy & Saqib Aziz, 2021. "The Bitcoin options market: A first look at pricing and risk," Applied Economics, Taylor & Francis Journals, vol. 53(17), pages 2026-2041, April.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:17:p:2026-2041
    DOI: 10.1080/00036846.2020.1854671
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    Cited by:

    1. José Almeida & Tiago Cruz Gonçalves, 2022. "A Systematic Literature Review of Volatility and Risk Management on Cryptocurrency Investment: A Methodological Point of View," Risks, MDPI, vol. 10(5), pages 1-18, May.
    2. Brini, Alessio & Lenz, Jimmie, 2024. "Pricing cryptocurrency options with machine learning regression for handling market volatility," Economic Modelling, Elsevier, vol. 136(C).
    3. Kuo-Shing Chen & Yu-Chuan Huang, 2021. "Detecting Jump Risk and Jump-Diffusion Model for Bitcoin Options Pricing and Hedging," Mathematics, MDPI, vol. 9(20), pages 1-24, October.
    4. Boyi Li & Weixuan Xia, 2024. "Crypto Inverse-Power Options and Fractional Stochastic Volatility," Papers 2403.16006, arXiv.org, revised Sep 2024.
    5. Pierre J. Venter & Eben Maré, 2021. "Univariate and Multivariate GARCH Models Applied to Bitcoin Futures Option Pricing," JRFM, MDPI, vol. 14(6), pages 1-14, June.

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