Managing expiration and exercise for Micro Cryptocurrency options

All options have an expiration style and expiration date. These attributes determine how an option can be exercised along with the date the option will no longer exist. While any option position can be closed out at any time prior to its expiration, it’s important to be knowledgeable of the option style and how expiration is handled for any option you are trading.

Options on Micro Bitcoin and Ether futures are European-style.  This means they can be exercised only at expiration by the option buyers, also referred to as long holders. Option sellers, or short holders, can trade and hedge positions with certainty, knowing that early exercise is prohibited. Additionally, contrary instructions are not allowed. The prohibition of contrary instructions provides market participants assurance that options which expire in-the-money will always be exercised while options that expire out-of-the money will always be abandoned. This feature of European options also allows for certainty regarding position management.          

Micro Cryptocurrency options have a physical delivery style. Upon expiry, in-the-money Micro Cryptocurrency options will deliver their respective underlying futures contract.  The monthly options will expire at the same time as their underlying futures, which is always the last Friday of the contract month at 4:00 p.m. London time. Upon expiration, each in-the-money monthly option will deliver one respective futures contract, which immediately settles to the cash value of the corresponding reference rate. For Micro Bitcoin futures, that would be the CME CF Bitcoin Reference Rate (BRR). For Micro Ether futures, that would be the CME CF Ether Dollar Reference Rate.

Following expiration, a trader would no longer have exposure to the market because both the options and futures contracts expire at the same time, on the same day. The weekly Monday, Wednesday, and Friday Micro Cryptocurrency options will expire before their underlying futures contract. Traders who are exercised or assigned a futures position will receive a long or short futures position. 

The trader would have futures market exposure until they trade out of the resultant futures position or until the futures contract expires.  It’s important to note that the physical delivery style of the weekly options pertains to delivery of the futures contract. Under no circumstances will a Micro Cryptocurrency option or futures contract deliver a cryptocurrency coin. Traders have the flexibility to manage their futures positions on the CME Globex platform. 

The options’ moneyness will be determined by a fixing price. For example, assume a trader is long a Micro Bitcoin weekly Wednesday call option with a May 4 expiration at a strike price of 37,000. As expiration approaches, CME Group will calculate a ‘fixing price’ to determine the option’s moneyness.  The fixing price is based on trade activity across both standard and micro sized futures contracts during the last half hour of trading of the option contract’s life.    

With Bitcoin and Micro Bitcoin futures trading near 38,000 as the fixing window begins at 3:30 pm London time, notionally adjusted trade data for Bitcoin and Micro Bitcoin futures is used to calculate the volume weighted average price (VWAP) of the two contracts. At the conclusion of the 30-minute window, assume the calculated fixing price is 38,015. Our trader’s option trade is in-the-money and they will receive a long Micro Bitcoin futures position at a price of 37,000. 

Although this position is currently profitable for the trader, they will now need to manage their futures position, as they still have exposure to the underlying futures market.  Fixing prices will be posted to the CME Group website, so traders can verify the moneyness of their positions at expiry. Micro Ether options also utilize an equivalent fixing process based on transactions in Ether futures and Micro Ether futures during the last half hour of the contract’s life. 

It’s important to understand the nuances of the option’s style and what happens at expiration so you can more precisely manage risk and efficiently express a market view.