Are Bitcoin Futures Options a Cheaper Way to Play the Bitcoin Lottery?

Abstract

We examine trading behaviors in bitcoin futures options on the Chicago Mercantile Exchange, utilizing two years of daily data to analyze implied volatility from January 13, 2020, to December 31, 2021. Our findings reveal a unique 'bitcoin lottery' phenomenon, characterized by a significant positive correlation between at-the-money call options' implied volatility and bitcoin returns-a stark contrast to the S&P 500 options market. This speculative behavior fosters a symmetric volatility smile and a positive term structure for outof-the-money options, indicating a market preference for leveraging bitcoin's volatility. Notably, the analysis shows that call options, especially those with longer durations, are priced higher than put options, reflecting a market tendency towards more accessible long-term investments in bitcoin.

Keywords: Bitcoin Futures Options, Implied Volatility Analysis, Bitcoin Lottery Hypothesis, Options Trading Dynamics. JEL: E31, G11, G12