Illiquid Bitcoin Options
43 Pages Posted: 18 Jul 2022 Last revised: 25 Sep 2023
Date Written: July 15, 2022
This paper conducts a first look into the regulated Bitcoin options market in the United States. Compared to stock options, bitcoin options tend to be ten times more illiquid as measured by bid-ask spreads. The illiquidity significantly affects bitcoin options pricing: Given that investors are on average net sellers of bitcoin options, heightened illiquidity is associated with a significant premium in subsequent delta-hedged returns, which also strengthens under more imbalanced investor orders. To support the reasonings behind our findings, we further exploit a policy change that allows retail participation and significantly influences order imbalances in the Bitcoin options market.
Keywords: Bitcoin, Options, Liquidity
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