Casey Wagner

Ben Strack


<p>Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:</p>



<ul class="wp-block-list">
<li>How markets are reacting to the latest inflation print that was just in line with expectations.&nbsp;</li>



<li>Ben unpacks what’s happening — or not happening — with bitcoin ETF (and other crypto) options.&nbsp;</li>



<li>It was another volatile week for markets, even as data points showed few surprises. We break down what happened.&nbsp;</li>
</ul>



<h2 class="wp-block-heading">Markets react to final PCE before anticipated FOMC</h2>



<p>We are 19 days out from the next policy-setting Fed meeting and the latest inflation numbers are in.&nbsp;</p>



<p>The personal consumer expenditures (PCE) price index dropped this morning, showing that inflation is rising exactly as expected. Prices rose 0.2% between June and July and 2.5% in the 12 months ended July, today’s report showed.&nbsp;</p>



<p>So-called core PCE (excluding volatile food and energy) rose 0.16% month over month.&nbsp;</p>



<p>The PCE is the Fed’s favorite inflation gauge. It’s a better measure than the CPI given it is broader and considers consumer behavior. (As fellow tennis fans in NYC may appreciate, <a href="https://x.com/caseywagnerr/status/1829273787205820595"><em>my</em></a> preferred measure of inflation is the Honey Deuce cocktail at the US Open — up 4.5% from last year — but I digress.)</p>



<p>Markets reacted well to the news initially before paring gains later in the session. As of 2 pm ET, the S&amp;P 500 was up 0.11% over the day and the Nasdaq Composite had gained 0.2%.&nbsp;</p>



<p>Stocks are poised to end August in the green for the first time in years. The S&amp;P 500 is currently up 2.8% since the first of the month, while the Nasdaq Composite has gained 1.9% over that span. In 2023, the S&amp;P 500 and Nasdaq Composite indexes closed August 1.6% and 2.1% lower, respectively.&nbsp;</p>



<p>Bitcoin and ether, on the other hand, are deep in the red. Bitcoin has lost close to 12% over the past 30 days while ether is down more than 25%, according to data from Coinbase. Bitcoin was down 3.2% and ether was trading 4.2% lower over the past 24 hours at 2 pm ET.&nbsp;</p>



<p>Today’s data bodes well for a September rate cut, which we already knew was coming after Powell’s Jackson Hole remarks last week. But added reassurance is never a bad thing. When exactly risk assets will bounce back, however, remains more of a question.&nbsp;</p>



<p>“With Powell and the Fed signaling the start of a rate-cutting cycle, we anticipate increased global liquidity will eventually lift risk assets,” analysts at Ryze Labs wrote in a Friday note.&nbsp; “There are early signs of this: the People&#8217;s Bank of China injected a substantial RMB 1,042 billion ($150 billion) into Chinese money markets this week, boosting liquidity in global manufacturing, industrial sectors and commodity markets.”</p>



<p>Next week we will get the August employment report, another data point that will be a key piece to the puzzle when trying to determine if central bankers will go for a cut of 25 or 50 basis points.</p>



<p>— <em>Casey Wagner&nbsp;</em></p>



<h2 class="wp-block-heading">12</h2>



<p>The number of percentage points by which Donald Trump leads Kamala Harris among likely voters who own crypto, according to a <a href="https://www.fdu.edu/news/fdu-poll-finds-trumps-embrace-of-crypto-pays-off/">poll</a> published Friday by Fairleigh Dickinson University.</p>



<p>Fifty percent of crypto-owning likely voters polled sided with Trump, while 38% prefer Harris. The vice president leads by 12 points among those who say they don’t own crypto (53% to 41%).&nbsp;&nbsp;</p>



<p>“Trump has been reaching out to the crypto community, and it seems to have paid off,” FDU professor Dan Cassino said in a statement. “It might be easy to dismiss them as insignificant, but I don’t think people realize exactly how widespread crypto ownership is.”</p>



<p>Ashley Ebersole, general counsel at 0x and a former senior counsel at the SEC, told Blockworks in an interview that he expects that both <a href="https://blockworks.co/news/more-crypto-remarks-likely-coming-from-trump-harris">Trump and Harris will speak</a> more about the topic.  </p>



<h2 class="wp-block-heading">More investor ‘options’</h2>



<p>Though the SEC has not yet allowed options on the US spot bitcoin ETFs, the agency’s decision on that is expected next month.&nbsp;</p>



<p>In the meantime, Nasdaq earlier this week proposed Bitcoin Index Options (XBTX). The final settlement value would be determined by CF Benchmarks’ Bitcoin Reference Rate New York variant (BRRNY).</p>



<p>A quick refresher on options: They’re contracts representing the right to buy or sell a financial product at a certain price within a specified period.</p>



<p>CF Benchmarks CEO Sui Chung said he can’t comment on discussions with regulators. He did, however, point out: “XBTX is structured like many foreign exchange index options that already trade: options are cash-settled to a spot reference rate.”</p>



<p>To that point, the SEC would have no rational basis to deny this proposal, said Patrick Daugherty, a partner at law firm Foley &amp; Lardner who also teaches about digital assets at Cornell Law School.</p>



<p>“Like foreign currency, bitcoin is liquid and markets for bitcoin demonstrate significant volume and turnover,” he told Blockworks. “The existing markets readily inform the spot market price of bitcoin, and the sufficiency of market surveillance for bitcoin products is now well-established.”</p>



<p>The Nasdaq index options product would give investors another way to hedge, or speculate on, the market risk associated with spot bitcoin exposure, Daugherty added.&nbsp;</p>



<p>“These index options could be used for a wide range of activities such as asset valuation, settlement of financial risk, risk management, NAV calculation, unit creation and unit redemption,” he said.</p>



<p>The proposal came the same week CME Group <a href="https://www.cmegroup.com/media-room/press-releases/2024/8/27/cme_group_to_launchbitcoinfridayfuturesonseptember30.html">plotted</a> other crypto derivatives called Bitcoin Friday futures — set to go live on Sept. 30, “pending regulatory review.”</p>



<p>So if these new offerings are coming, what about options for the spot bitcoin ETFs? After all, there are options available on bitcoin futures ETFs — and even on leveraged crypto funds.&nbsp;</p>



<p>Those too are a matter of time, Bloomberg Intelligence analyst James Seyffart has said:&nbsp;</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">We think the <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a> ETF options happen in 4th quarter this year. Final deadline for SEC decision is ~Sept. 21 but there&#39;s more steps needed after that from OCC &amp; CFTC. <br><br>Here are some BTC &amp; ETH related ETFs including leveraged that already have options. cc <a href="https://twitter.com/EricBalchunas?ref_src=twsrc%5Etfw">@EricBalchunas</a> <a href="https://t.co/xErD5oPiWb">https://t.co/xErD5oPiWb</a> <a href="https://t.co/USauv6QaFs">pic.twitter.com/USauv6QaFs</a></p>&mdash; James Seyffart (@JSeyff) <a href="https://twitter.com/JSeyff/status/1821627790065799634?ref_src=twsrc%5Etfw">August 8, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<p>Spot commodity products are registered under the Securities Act of 1933 and therefore must receive individual review and approval from the SEC, Grayscale Investments <a href="https://www.grayscale.com/blog/legal-topics/investors-deserve-options-on-gbtc">has noted</a>. That is unlike the futures funds registered under the Securities Act of 1940.</p>



<p>Not to mention the CFTC would also need to OK the spot bitcoin ETF options, perhaps further <a href="https://blockworks.co/news/sec-spot-btc-options-delay">explaining the hold-up</a>.</p>



<p>I feel like this patience-is-a-virtue trope is becoming an industry (and newsletter) theme.&nbsp;</p>



<p>— <em>Ben Strack</em></p>



<h2 class="wp-block-heading">Did You Notice</h2>



<p>Happy Friday! It was a volatile week for markets even as data came in more or less as expected. Here’s what to know heading into the long weekend:&nbsp;</p>



<ul class="wp-block-list">
<li>As Felix wrote about <a href="https://blockworks.co/news/nvidia-earnings-and-the-baked-in-premium">yesterday</a>, investors were unimpressed with NVIDIA’s historic earnings report on Wednesday afternoon. The AI chipmaker once again beat analyst expectations, reporting more than $30 billion in sales (a 122% year-over-year increase) and $16.6 billion in profit (projections called for $15 billion). Still, shares fell as much as 5% after hours Wednesday and are still down about 2.5% from Wednesday’s close. It was enough to bring down Big Tech (XLK is down 2.3% over the week). I’d expect the rotation out of tech into cyclicals to continue for now.&nbsp;</li>



<li>Initial jobless claims fell by 2,000 the week ended Aug. 24, Thursday’s report showed. It was on par with expectations and should be a positive sign for FOMC members, who are hoping to prevent further tightening in the labor market. Odds of a 25-basis point interest rate cut next month now sit at nearly 70%, according to CME Group <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html">data</a>.&nbsp;</li>



<li>The GDP got an upward <a href="https://www.bea.gov/news/2024/gross-domestic-product-second-estimate-corporate-profits-preliminary-estimate-second">revision</a> to 3% on Thursday after the Commerce Department previously estimated that economic growth increased at a rate of 2.8% during the second quarter. It’s a big acceleration from Q1’s GDP, which was 1.4%, showing that consumers are feeling resilient. Soft landing here we come?&nbsp;</li>
</ul>



<p>— <em>Casey Wagner&nbsp;</em></p>



<h2 class="wp-block-heading">Bulletin Board&nbsp;</h2>



<ul class="wp-block-list">
<li>The US spot bitcoin ETFs saw a third straight day of net outflows on Thursday, according to Farside Investors <a href="https://farside.co.uk/bitcoin-etf-flow-all-data/">data</a> — totaling roughly $300 million over that span. Net flows for ether funds were nearly non-existent yesterday as seven of the nine US spot products saw zero flows.&nbsp;&nbsp;</li>



<li>Check out Blockworks reporter Donovan Choy’s latest <a href="https://blockworks.co/news/ethereum-foundation-treasury-management-concerns">story</a> about what some have deemed a lack of transparency around the Ethereum Foundation’s spending. The Empire newsletter team most recently <a href="https://blockworks.co/news/circle-paypal-stablecoins-keep-notching-gains">dug into stablecoins</a>.&nbsp;</li>



<li>Despite the holiday weekend, there’ll be an On the Margin newsletter in your inbox on Labor Day. We’ll be discussing September’s possible market movers and the evolving euro-backed stablecoin scene. If you’re reading this on blockworks.co, make sure to subscribe to the OTM newsletter <a href="https://blockworks.co/newsletter/onthemargin">here</a>.</li>
</ul>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



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How markets are reacting to the latest inflation print

<div id="highlights-block_627d366985b12" class="highlights">
        <ul>
                <li>In a volatile market, crypto options can be used to help reduce risk in trading portfolios.</li>
                <li>Sophisticated options strategies have potential to protect traders from &#8216;catching knives&#8217; in attempts to time market bottoms.</li>
            </ul>
    
</div>



<h2 class="wp-block-heading">Intro to crypto options trading</h2>



<p>Crypto options trading can be confusing, especially in a sea of derivatives. But for traders looking to hedge risk on a long or short trade, this derivative is a powerful tool.</p>



<p>The mechanics of options trading are similar in both the stock and crypto markets. In this guide, you&#8217;ll learn how crypto options trading works and the benefits and risks of popular strategies.</p>



<h2 class="wp-block-heading">Options trading definition</h2>



<p>A stock or crypto option is a contract that <strong>gives you the right but not the obligation to buy or sell an asset at a specific price. </strong>American options provide that right within a given timeframe and European options can only be exercised on a specific expiration date.&nbsp;</p>



<p><strong>Call option contract: </strong>The right to buy&nbsp;</p>



<p><strong>Put option contract: </strong>The right to sell</p>



<p>Options trading is how investors buy and sell these contracts in an open market. Since there isn&#8217;t an obligation to buy or sell, this type of trade is fundamentally a way to reduce risk.</p>



<p>That is not to say every option trade is risk-averse. With options trading strategies, you either pay someone to take on risk for you, or you can get paid to take on someone else&#8217;s risk. They also allow you to speculate on the future price of an asset while hedging your potential losses.&nbsp;</p>



<h2 class="wp-block-heading">Options trading in crypto markets</h2>



<p><a href="https://bit.ly/3Py8E6Y">Bit.com</a> is one of the leading crypto options markets. They offer BTC, ETH, and BCH options and attract both institutional and retail investors.</p>



<p>So far, the most popular option pairs are BTC and ETH. Bit.com pioneered BCH pairs in 2021, and Deribit introduced SOL pairs in 2022. Crypto options proponents believe that the market should adopt more mainstream pairs to provide ample hedging and investment opportunities.</p>



<h2 class="wp-block-heading">How crypto options differ from traditional markets</h2>



<p>There are minor differences between crypto and stock options trading. First, crypto markets are open 24/7, unlike stock markets, which close on the weekends and at 4 pm EST on weekdays.&nbsp;</p>



<p>Another difference is premiums. Because <a href="https://www.investopedia.com/terms/i/iv.asp#:~:text=Implied%20volatility%20is%20the%20market's,factors%20for%20calculating%20implied%20volatility.">implied volatility</a> is essential in pricing options, crypto options can be costly. On the other hand, higher volatility can increase profit potential. One trader saw a paper profit of more than <a href="https://www.coindesk.com/markets/2020/12/07/how-one-bitcoin-options-trader-turned-638k-into-44m-in-5-weeks/">$4 million</a> on a $638,400 trade back in 2020.</p>



<h2 class="wp-block-heading">Inversed vs. USD-denominated options</h2>



<p>Inversed options are quoted in the token whilst USD-denominated quoted in stablecoins. Due to the legacy reasons in the crypto space, most of the existing options are offered as inversed options. To allow more investors to participate in crypto options trading, Bit.com has told Blockworks it will offer USD-denominated options in July 2022. USD-denominated options are more straightforward in understanding option premium and calculating the PnL, especially in the Unified Margin system, where all assets are calculated as collateral in its USD value in a haircut ratio.&nbsp;</p>



<p>Bit.com believes that USD-denominated options will provide users more access to crypto options trading as it is easier to calculate altcoin option price.&nbsp;</p>



<h2 class="wp-block-heading">Calls explained</h2>



<p>A call option is a contract that gives you the <strong>right to buy</strong> a digital asset at a specific price.</p>



<p>Let&#8217;s say the price of BTC is $30,000, but you think it will go up in the next month. On<a href="https://bit.ly/3Py8E6Y"> Bit.com</a> you could buy a call option for one bitcoin at a strike price of $35,000. We&#8217;ll say the premium is $400, and the contract expires at the end of the month. Now imagine the price of BTC surged to $37,000. By exercising your call option, you would buy at a discount of $1,600 (BTC&#8217;s price, minus the strike price, minus your option premium). You wouldn&#8217;t profit $1,600 unless you also sold BTC at $37,000.&nbsp;</p>



<p>If, however, the price of BTC did not reach the strike price of $35,000, you would only lose your $400 premium.</p>



<p>Keep in mind that if you are using European options, you would have to wait for the expiration date to exercise the option. Since this limits flexibility, the premium charged for European options is usually lower.&nbsp;</p>



<h2 class="wp-block-heading">Puts explained</h2>



<p>A put option is the reverse of a call option. It&#8217;s a contract that gives you the <strong>right to sell</strong> a digital asset at a specific price <strong>within a given period.</strong></p>



<p>Traders often buy put options if they expect the price to fall. For example, if you had anticipated bitcoin’s drop to the mid $25,000s, you could have bought a put option for 1 BTC at a strike price of $30,000. This move would give you the option to exercise a sell of bitcoin at $30,000 minus the cost of the premium. If you were to use a European option, you would only have this option at the expiration date.&nbsp;&nbsp;</p>



<h2 class="wp-block-heading">Crypto options trading strategies&nbsp;</h2>



<p>The strategy you use for options will determine your success. Here are a few.</p>



<h3 class="wp-block-heading"><strong>Bull markets</strong></h3>



<p><strong>Call options:</strong> </p>



<p>If there are strong bull trends and prices are rising, buying a call option can allow you to profit if the price goes up as expected while limiting your risk to the cost of the contract premium if it doesn&#8217;t reach the strike price.&nbsp;</p>



<h3 class="wp-block-heading"><strong>Bear markets </strong>&nbsp;&nbsp;&nbsp;</h3>



<p><strong>Put options: </strong></p>



<p>If the market is headed down, people who already hold crypto experience doubt and lack of confidence. But in a bear market, put options can still generate a profit. As the price goes down, buying a put contract ensures you can exercise a sell at your predetermined price.</p>



<h4 class="wp-block-heading"><strong>Selling puts in a market correction: </strong></h4>



<p>If you have spent any time on crypto Twitter, you have undoubtedly seen #buythedip. It is a classic long trading strategy. If a trader has a long position on an asset, they will use price dips to buy more.&nbsp;&nbsp;</p>



<p>These traders often see bear markets as buy-the-dip opportunities because they offer discounted prices on assets they are long on. However, traders risk #catchingknives by directly buying assets they believe are in correction territory. Catching knives is a phrase for when a trader buys a dip, but the price continues to fall below correction territory into a longer-term or permanent bearish trend.&nbsp;&nbsp;&nbsp;</p>



<p>To hedge the risk of catching knives, traders that believe a digital asset will correct up will sell put option contracts to traders who believe the price will continue to drop.&nbsp;</p>



<p>For example, let&#8217;s say BTC is at $30,000. You believe that it might dip a little more to $25,000, but it is still a long-term buy. Trader B thinks that the price will drop to $20,000 by the end of the month.&nbsp;&nbsp;</p>



<p>So instead of waiting to buy at $25,000, you sell a put with a strike price of $24,500 (premium of $700). Trader B will want to buy that put option because if they wait to buy BTC at $20,000, it will allow them to sell BTC (or exercise their option) at $24,500&nbsp;</p>



<p>So let&#8217;s say that BTC hits $25,000 and you decide to cover your position (or buy BTC at $25,000). If the price continues to drop and trader B exercises their right to sell at 24,500, you pocket a $200 profit (minus commission) in premiums. But if the price reverses and the option expires, you benefit from holding a long-term position in BTC plus a $700 profit in premiums.&nbsp;</p>



<h2 class="wp-block-heading">Managing risk with options</h2>



<p>People who want to hold bitcoin and other cryptocurrencies but don&#8217;t enjoy the market volatility can use options to reduce risk by hedging for potential market moves.</p>



<p>Let&#8217;s say you&#8217;re holding BTC, but you think a market correction is coming. Instead of selling your Bitcoin, you could buy put options. If the price goes down, your downside is limited to the premiums you paid.</p>



<p>Another way to manage risk using options is by reducing the capital needed for investment. By spending only the amount of money required to buy an option contract, the remaining capital can gain yields elsewhere for the length of the contract.</p>



<h2 class="wp-block-heading">Covered vs. uncovered</h2>



<p>A covered call is when you sell a call option contract based on assets you hold. If you&#8217;re long BTC and want to create income, you can sell call options for a strike price lower than where you expect the market to go. You&#8217;re covered if the contract buyer executes because you own the underlying asset. If the call options expire, you&#8217;ve pocketed the premiums.</p>



<p>Conversely, an uncovered option is selling an option when you don&#8217;t have a position in the underlying asset. This option selling is risky because you&#8217;re obligated to the position if the buyer wants to exercise the option.</p>



<h2 class="wp-block-heading">Option margin</h2>



<p>Option margin is the collateral you must give to a broker before you can write or sell options. This collateral amount varies depending on the broker but must meet minimum federal requirements.&nbsp;</p>



<p>If the value of the margin account drops below the requirement, it can cause a margin call, requiring you to either deposit more or liquidate assets. However, some brokers do not have margin requirements for options like covered calls because the underlying asset is used as collateral.</p>



<h2 class="wp-block-heading">Unified margin and portfolio margin</h2>



<p>A new trading tool called the <a href="https://support.bit.com/hc/en-us/articles/4407127117209-1-Brief-introduction-on-Unified-Margin-System">Unified Margin (UM) system</a> is one of the standout features of the bit.com exchange. It allows traders to manage risk by making all their assets eligible collateral.&nbsp;</p>



<p>You can trade spot, margin, perpetual, futures, and options with a single account. The UM system can improve capital utilization by calculating all your currencies in USD value with specific haircut ratios to provide margin for all your positions.</p>



<p>Trading can be confusing, futures and options trading even more so, but with tools like the UM system, you can run into one less complication while creating your trading strategy.</p>



<p>Since traders often use options trading to protect against significant loss in other trades, options can potentially reduce overall risk in their trading portfolio. Bit.com&#8217;s &#8216;<a href="https://support.bit.com/hc/en-us/articles/360057592293-Bit-com-Portfolio-Margin">Portfolio Margin (&#8216;PM&#8217;) tool</a> evaluates the risk of a portfolio by calculating the most likely loss that could occur.&#8217; Traders who use this tool can benefit from lower margin requirements if they properly reduce their portfolios’ exposure to loss. This tool, combined with Unified Margin, has the potential to maximize fund efficiency by calculating PnL in real-time.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>



<h2 class="wp-block-heading">Final considerations</h2>



<p>Crypto options trading can be risky on top of an already volatile crypto market. With margin trading especially, liquidation is a major risk factor. So make sure you educate yourself and trade carefully, knowing what you&#8217;re liable to lose.</p>



<p><strong>Related Articles</strong></p>



<p><a href="https://cms.blockworks.co/the-investors-guide-to-defi/" target="_blank" rel="noreferrer noopener">The Investor’s Guide to DeFi 2.0</a></p>



<p><a href="https://cms.blockworks.co/the-investors-guide-to-yearn-finance/" target="_blank" rel="noreferrer noopener">The Investor’s Guide to Yearn Finance</a></p>



<hr class="wp-block-separator"/>



<p><em>This Investor’s Guide is sponsored by <a href="https://bit.ly/3Py8E6Y" target="_blank" rel="noreferrer noopener">Bit.com</a></em>.</p>



<p><em><em>Bit.com is not offered in the United States of America. Nothing in this article is intended to provide investment, legal or tax advice and nothing in this article should be construed as a recommendation to buy, sell, or hold any investment or to engage in any investment strategy or transaction.</em></em></p>


Crypto Options