Cryptocurrency Options

1. Theoretical Overview of Cryptocurrency Options

A cryptocurrency option is a derivative financial contract that gives its holder the right (but not the obligation) to buy or sell a specified amount of a crypto asset (such as BTC or ETH) at a predetermined strike price in the future. There are two main types of options: call options – the right to buy the underlying asset at a fixed price, and put options – the right to sell the underlying asset at a fixed price. The option buyer pays the seller a premium, which is the price of the contract, in order to acquire this right. If, at the time of expiration, the market moves favorably for the holder, they can exercise the option and realize a profit; if not, the option expires unexercised, and the holder’s loss is limited to the premium paid.

American and European Options. The execution style distinguishes American options (which can be exercised any time before or on the expiration date) and European options (which can only be exercised on the expiration date). Cryptocurrency options are usually European – for example, all options on derivative exchanges like Deribit are only executed on the expiration date. This means the holder cannot exercise the option before the expiration date, although they are always free to sell the option contract on the market before expiration to lock in a profit or loss.

Underlying Asset and Option Settlement. The underlying asset of a cryptocurrency option is either the cryptocurrency itself (BTC, ETH, etc.) or a futures contract on it. Upon expiration, there are two possible settlement options: physical and cash. In a physical settlement, the underlying asset is delivered – for example, an exercised call option on BTC results in the buyer receiving 1 BTC at the strike price. In a cash settlement, no asset is delivered – instead, the difference between the market price and the strike price is paid in the quote currency (USD, USDT, etc.). In cryptocurrencies, cash settlement is more common, where the profit/loss from the option is paid in a stablecoin or another agreed-upon currency, rather than the actual transfer of BTC/ETH. Cash settlement is more convenient and avoids the need to own or transfer the underlying asset upon expiration.

Features of Cryptocurrency Options. The cryptocurrency derivatives market has several differences from traditional markets. Trading occurs 24/7 worldwide, without fixed trading sessions, reflecting the continuous nature of crypto markets. The volatility of BTC and ETH prices is generally much higher than that of traditional assets, so option premiums (prices) can be significant. For example, the expected volatility of Bitcoin (DVOL index on Deribit) often exceeds 70–80% annually, whereas such figures are unusually high for stocks or currencies. High volatility expands the potential profit from options strategies, but it also increases risk. Moreover, in the absence of a commonly recognized risk-free rate in cryptocurrencies (similar to treasury bond rates in fiat currencies), option pricing may take into account alternative factors – such as stablecoin rates, risk premiums, or the cost of holding the asset. However, basic valuation principles (such as the Black-Scholes model for European options) are applied in crypto, with adjustments for extreme volatility and 24/7 trading.

2. Advantages and Disadvantages of Cryptocurrency Options

Advantages (Pros)

Risk Hedging. Options allow investors to protect their portfolios from unfavorable price movements. For example, an owner of a large amount of BTC can buy put options, thereby setting a minimum selling price for the asset during the option’s life. In the case of a market decline, the purchased puts will offset losses on the underlying asset, limiting the risks. Similarly, miners or long-term holders use options as a hedge against market drawdowns.

Speculation with Limited Risk. Options offer the opportunity to profit from price increases or decreases with a lower capital investment compared to directly purchasing the asset. By buying a call, a trader gains potentially unlimited upside with limited losses (the premium), and by buying a put, they can profit from price drops, again risking only the premium. This makes options a convenient tool for volatility trading: with the correct prediction, substantial profits can be made with less capital invested. Therefore, options provide built-in leverage: the premium is typically much smaller than the cost of the underlying asset, which increases the percentage return on capital invested.

Strategy Flexibility and Diversification. By combining different options and underlying assets, investors can create complex payout structures. For example, strategies like spreads, straddles, “iron condors,” etc., allow traders to profit from certain volatility scenarios or price ranges. Options can be used to generate income (through premium sales) or to create synthetic positions (as discussed below). Adding options to a portfolio provides a different risk-return profile, helping to diversify sources of income. For example, selling volatility (selling options) can bring in steady premium income that is not directly correlated with market direction, adding stability to the portfolio.

Limiting Losses and Financial Leverage. When trading options, the buyer does not bear any risk beyond the premium paid – this is the maximum possible loss for the holder. In contrast to margin trading on spot or futures markets, where a position can result in losses greater than the initial deposit, options provide an inherent loss limit. At the same time, due to the relatively small size of the premium compared to the cost of the asset, options offer financial leverage – for example, controlling 1 BTC through an option means paying only a fraction of the BTC price. Thus, options require less capital investment while providing access to the same asset with leverage, allowing strategies that are not available on the spot market.

Disadvantages (Risks and Cons)

Complexity and Knowledge Requirements. Options are more complex than spot trading. Traders need to understand concepts like time decay, volatility (both realized and implied), and the Greeks (delta, theta, gamma, etc.) in order to assess risks. Misunderstanding the dynamics of option pricing can lead to errors. Moreover, pricing options requires accounting for many factors, which makes analysis more complicated compared to linear instruments.

High Volatility and the Risk of Complete Premium Loss. The cryptocurrency market is volatile, and options are often sold at high premiums. However, if the market moves in the opposite direction, an option can quickly lose its value. Option buyers risk losing 100% of the premium invested if the contract expires “out of the money.” For example, a trader who buys a call option on BTC will lose the entire premium if the price does not rise above the strike price by expiration. This high market volatility can lead to rapid capital loss, especially when using complex strategies or leverage.

Limited Lifespan. Unlike a spot asset, which can be held indefinitely, an option has a finite life. Time works against the buyer (the theta effect): every day of uncertainty slowly erodes the option’s time value. If the trader’s expectation is not realized by expiration, the contract becomes worthless. This adds time pressure – not only must the trader predict the direction of market movement, but also its timing. For cryptocurrencies, which can consolidate for long periods, this is a significant risk factor for option holders.

Low Liquidity and Execution Issues. The cryptocurrency options market is still relatively young. Liquidity (trading volumes, bid-ask spreads) is lower than on spot or futures markets, especially for long-dated strikes or expirations. This means higher liquidity risks: it can be difficult to enter or exit a large position quickly without slippage. Additionally, infrastructure reliability can be an issue – most options trading takes place on separate derivative exchanges. Technical failures or trading pauses on the platform can hinder timely execution. There is always counterparty risk: exchanges may experience hacking, defaults, or regulatory problems. Therefore, it is important to choose reliable platforms and account for platform risks and slippage when executing orders.

Margin Requirements and Seller Risk. While buyers of options risk only the premium, sellers (writers) of options bear potentially unlimited risk. A call option seller, without holding the underlying asset (naked call), may incur huge losses in the event of a sharp price increase. As a result, exchanges require margin to be posted by option sellers. These margin requirements can increase significantly as volatility rises, leading to the risk of position liquidation for sellers. Therefore, while selling options offers stable premium income, it comes with serious risks and requires advanced risk management.

Overall, cryptocurrency options provide traders with flexibility, risk management, and the opportunity to profit from market volatility. However, to successfully trade them, it is essential to understand their mechanics and be aware of the associated risks – from market risks to technical ones. Below, we will explore how options (and futures) are used to implement arbitrage strategies and synthetic positions.

3. Arbitrage Strategies Between Options, Futures, and the Spot Market

Arbitrage, in general, is a strategy for obtaining nearly risk-free profits by exploiting price inefficiencies between related markets or instruments. In an efficient market, the prices of various derivatives and the underlying asset should align according to specific formulas. If there is a mispricing, opportunities arise for arbitrageurs to assemble a portfolio of buying and selling different instruments in such a way that allows them to lock in a profit without market risk. In cryptocurrencies, the most common arbitrage schemes involve the spot market, futures, and options, which will be discussed here. Below is an overview of the theoretical foundations and specific strategies: cash-and-carry (spot-futures), its reverse counterpart, arbitrage based on the put-call parity, and the creation of synthetic positions using options and futures.

Cash-and-Carry: Spot-Futures Arbitrage (Cash-and-Carry)

Cash-and-carry is a classic arbitrage strategy between the spot and futures markets. The essence is: buy cryptocurrency on the spot market and simultaneously sell a futures contract for the same asset at a higher price (i.e., when there is a futures premium to the spot). This premium situation is called contango: futures trade at a higher price than the current spot price. The premium often arises from margin financing costs, asset storage costs, or increased demand for long leverage. An arbitrageur implementing cash-and-carry effectively locks in this price difference as profit by eliminating price risk. They hold a long position in the underlying asset and an equivalent short position in futures, so price movements in the market are offset: if the BTC price rises, the profit on the spot market will balance the loss on the sold futures, and vice versa. The trader ultimately profits from the initial price difference (basis) between futures and the spot market, after accounting for costs. Since the position is hedged, the outcome is almost independent of asset volatility, making it close to a market-neutral strategy.

It is important that, by the time the futures contract expires, the arbitrageur can deliver the underlying asset at the price fixed in the contract. In cryptocurrencies, most futures are settled in cash, so instead of actual delivery, PnL is deducted or credited. In the case of physical delivery (e.g., CME futures deliver BTC), the trader simply holds the asset purchased on the spot until expiration and delivers it at the futures price. In both cases, the profit is calculated as: futures sale price – spot purchase price – costs. Costs may include commissions and costs for maintaining the position (e.g., interest if funds were borrowed to purchase the asset).

Let’s consider a simple example: suppose BTC is currently trading at $30,000 on the spot, and the futures contract expiring in 3 months is priced at $31,500. The difference of $1,500 corresponds to about 5% of the spot price. The arbitrageur buys 1 BTC at $30k and simultaneously opens a short position on 1 BTC futures at $31.5k. Upon expiration, regardless of where the market is, the positions cancel out: either by selling the purchased BTC at the market price and settling with the exchange using the futures, or by delivering the BTC at $31.5k. Ultimately, the trader will receive about $31,500 for the BTC, which cost them $30,000, locking in about $1,500 of profit (minus commissions). This profit of 5% over 3 months would annualize to about 20% – a good return for an almost risk-free trade. In practice, the basis (premium) fluctuates over time and depends on market conditions. In favorable periods, BTC and ETH futures often trade with a significant premium, averaging around 10% annually from 2019-2021, and in bullish market moments, the premium could exceed 30-40% annually. For example, in Q1 2024, the annual premium on 3-month Bitcoin futures briefly reached ~28%. Naturally, such a high risk-free income attracts arbitrageurs, and their activity typically brings the premium down to more moderate levels.

It’s worth noting that cash-and-carry has limitations: one needs capital to purchase the underlying asset or the ability to borrow it at a low interest rate. Additionally, there are financial costs – such as the cost of rolling over futures for a long duration (funding, if dealing with perpetual swaps) or the opportunity cost of using funds elsewhere. In recent years, the attractiveness of this strategy has changed depending on the market phase: when the basis yield falls below risk-free rates in traditional economies, interest in it declines. For instance, with a premium of only ~5% per year on futures in 2023-2024, many arbitrageurs found it insufficient compared to government bond rates of 4-5%. Nevertheless, cash-and-carry remains a popular way to earn income in the crypto market with low risk, especially among institutional traders and market makers.

Reverse Cash-and-Carry: Backwardation Arbitrage

The reverse situation – when futures trade below the spot price – is called backwardation. This signals bearish sentiment: market participants are willing to sell the future contract at a lower price, expecting the price to fall or facing a lack of funds to maintain long positions. The arbitrage opportunity here is to make the opposite trade: sell the underlying asset on the spot market (short position) and buy futures at a lower price. Thus, the trader attracts capital today by selling, for example, BTC on the spot, and later repurchases BTC cheaper through futures to return the borrowed funds or close the position. The price difference is again locked in as profit, regardless of market direction.

For example, the ETH market is under pressure, with the spot price of ETH at $2,000, and the monthly futures contract trading at $1,950 (a $50 discount). The arbitrageur borrows 1 ETH (or uses their own for a short position), immediately sells it for $2,000 on the spot, and simultaneously buys a 1 ETH futures contract at $1,950. At expiration, they will receive 1 ETH at $1,950 from the futures contract, which they will use to settle their short position (returning 1 ETH), leaving $50 in profit (minus borrowing interest and commissions). This scenario is called reverse cash-and-carry – essentially the same strategy but “in reverse.” It works when the market enters backwardation, which occurs during periods of panic or extreme negativity. In healthy conditions, BTC/ETH futures usually have a positive basis of 5-15% annually. However, during bearish trends, the premium disappears or turns negative. For instance, in July 2021, when BTC dropped from its spring highs, short-term futures occasionally traded with a negative basis (~minus 1% annually). Another example: before the long-awaited Ethereum Merge in 2022, ETH monthly futures had an anomalous discount of ~17% annually (expecting a fork and new tokens for spot holders). Immediately after the successful Merge, this imbalance disappeared – futures “caught up” with the spot price. Arbitrageurs who took advantage of this situation could earn significant profits with almost no risk by selling ETH on the spot at a higher price and buying discounted futures to close their position after the event.

It should be noted that reverse arbitrage opportunities often do not last long. As soon as futures fall below the spot, players willing to buy cheap futures and/or sell the spot to take advantage of the price discrepancy step in, correcting the prices. Therefore, prolonged backwardation in liquid markets is rare. Exceptions may occur in situations of systemic stress, where only a limited number of arbitrageurs have access to capital and opportunities to execute such trades (for example, during sharp price declines, access to margin may be restricted, and not everyone can immediately carry out arbitrage, allowing the discount to persist a bit longer).

Put-Call Parity and Option Arbitrage

Put-call parity is a fundamental relationship between the prices of call and put options with the same strike price and expiration date, as well as the price of the underlying asset. Under ideal conditions for European options, the formula holds:
C + PV(K) = P + S,
where C is the call option premium, P is the put option premium, S is the current spot price of the underlying asset, and PV(K) is the present value of the strike price K (i.e., the value of the payment of K at expiration, discounted at the risk-free rate).
In simpler terms, the value of the call plus the equivalent cash amount of the strike price should be equal to the value of the put plus the underlying asset. Intuitively: buying a call and holding the amount K in cash (to buy the asset at the strike price in the future) is equivalent to buying a put option and the underlying asset (since the put protects the asset from falling below K, ensuring the same payoff as a call + cash).

If market prices deviate from put-call parity, risk-free arbitrage opportunities arise. For example, the parity principle predicts a predictable relationship between the prices of calls and puts, and when this relationship is violated, traders can lock in risk-free profits. Let’s consider two scenarios:

• The call option price is inflated relative to the put. In this case, it is profitable to sell the call and simultaneously buy the corresponding put and the underlying asset (or equivalently, buy the put and open a long position in the asset, which is called conversion). At expiration, regardless of the asset’s price, the results of the positions will offset each other, and the initially obtained premium difference (sold expensive call minus bought cheaper put) will remain as profit. Specifically: by selling the call, we commit to delivering the asset at the strike price if the price rises, but we already own the underlying asset, so delivery is not an issue; the bought put protects us in case of a fall (we can sell the asset at the strike price). As a result, we have a fixed final portfolio value = K (due to the hedge), whereas initially, we received more premium than we paid due to the price imbalance. This difference is the risk-free profit for the arbitrageur.

• The put option price is inflated relative to the call. Here, the opposite strategy applies: sell the put, buy the call, and short the underlying asset (or sell the futures instead of shorting the spot). This combination is called reversal. The logic is similar: the premium received from the put option + the sold asset should be equal to the combination of the purchased call + borrowed funds at the strike price at expiration. If the put was overpriced, the profit will remain after fulfilling all obligations at expiration. For example, selling the put obligates us to buy the asset at the strike price if the price falls, but we already sold the asset at the current higher price (or contracted this through futures), and the bought call prevents a loss in the case of price rises, allowing us to acquire the asset at the strike price. All final calculations converge, leaving a premium difference as profit.

These arbitrage transactions based on put-call parity have long been known in traditional markets (conversion and reversal are also called conversion/reversal arbitrage). They are usually executed by large market makers who quickly buy up imbalances between option prices and the underlying market. On crypto markets, in the early years, there were noticeable deviations from parity, especially with options of short duration or low liquidity. However, with the development of platforms and the arrival of professional players, efficiency increased. Research shows that Bitcoin and Ether derivative markets have become more efficient over time, although arbitrage opportunities can still arise, especially during periods of increased volatility or blockchain congestion. In other words, gross price inefficiencies (such as clear violations of put-call parity) are quickly smoothed out, but during sharp market movements, short-term profit opportunities can appear for arbitrageurs who manage to execute a series of trades before prices realign.

It should be noted that classic put-call parity strictly applies to European options and environments with a risk-free funding rate. In cryptocurrencies, the situation is unique: trading often occurs against stablecoins with near-zero interest rates or against coin-margin contracts (e.g., options on Deribit for BTC or ETH). This complicates the use of the standard formula, as the underlying asset itself is volatile and may serve as the “currency” of the contract. In an academic paper (Alexander et al., 2023), a fiat-currency-free version of the parity formula for crypto markets was proposed, accounting for these nuances. However, for arbitrage purposes, traders generally just consider the current funding/interest rates: for example, the cost of futures or forwards, which can be used instead of the underlying asset. By replacing in the relation S + P – C = PV(K) the actual forward price (spot adjusted for holding costs until expiration), even in crypto, arbitrage can be found.

Practical Schemes

Based on parity, there are not only conversion/reversal but also other constructs. For example, box-spread – simultaneously buying a bull-spread (call with strike K bought, call with strike L sold) and a bear-spread (put with strike K sold, put with strike L bought). This combination of payouts is equivalent to a risk-free bond income (the difference between strikes is paid out at expiration in any case), so the value of the box should equal the present value of this difference. If the market price of the box differs, arbitrage arises: by buying or selling such an “option box,” one can borrow or invest capital at a risk-free rate higher than the market. On traditional markets, arbitrage funds track box-spread deviations. On crypto options, similar opportunities are also possible, though they are harder for non-professionals to detect.

Synthetic Positions Using Options and Futures

A synthetic position is a combination of derivatives (options, futures) and the underlying asset, which, in financial terms, is equivalent to another, direct position. The use of synthetic positions is closely related to arbitrage: if a direct instrument and its synthetic equivalent have different prices, there is an incentive to buy the cheaper one and sell the more expensive one, correcting the inefficiency. Let’s consider the main synthetic structures in the crypto market:

Synthetic Futures (Forwards). As a consequence of put-call parity, the combination of “buying a call and selling a put” with the same strike K and expiration gives the same result as a long position in a futures contract with strike K. Indeed, regardless of the price at expiration, the payoff from the call minus the put is equal to the difference (Spot – K), which is equivalent to the profit from a long forward position entered at price K. In practice, to match perfectly, the cost of financing needs to be considered: the portfolio (long call + short put) requires no initial investment only if the trader has already reserved capital PV(K) for the potential purchase of the asset at K. Therefore, a synthetic futures contract is practically realized as: borrow PV(K) capital, buy the underlying asset with it, and buy a put, while simultaneously borrowing against this asset (or pledging it) under interest – this results in a long call + cash. Despite these technical details, traders often use the call-put relationship to create synthetic futures positions. For example, if a futures contract for a particular date is illiquid or overpriced, they can instead buy a call and sell a put for the same expiration – this provides nearly the same exposure. Arbitrageurs monitor the price of such an option spread to match the real futures quote; deviations are quickly traded.

Synthetic Long or Short Position in the Underlying Asset. Similarly, an option can be combined with a futures contract to simulate asset ownership. For example, a call option + a short futures position is equivalent to a long position in the underlying asset + a put option. Intuitively: long asset + put = a protective position that guarantees at least K in case of a fall, while the call + short futures gives the right to benefit from upward movement, while simultaneously selling all movements above K – both combinations have the same payoff (K at worst and unlimited upside). Rearranging, we get: long call = long asset + long put – short forward. These relationships allow expressing any position in terms of others. If call or put options in the market are undervalued relative to futures, a synthetic version can be created to profit. For example, if a call is cheaper than an equivalent put (taking into account the basis), an arbitrageur may buy a call and sell a futures contract, simultaneously buying the asset and selling a put (as described earlier in the reversal) – essentially creating two positions with the same impact in different forms but different costs, locking in the difference as profit.

Synthetic Options. Using futures and the asset, one can synthesize the option itself. A classic example is: call = long forward + long put (rearranging parity). That is, to get a call option, the trader can buy a put and simultaneously buy a futures contract (or the asset) and borrow PV(K) capital. At expiration, this combination replicates the call option’s payouts: if the price is above K, the forward yields a profit (the asset is above the delivery price), and the put expires at zero; if the price is below K, the forward loses money, but the put compensates, providing the right to sell at K. Why is this useful? If the required option is missing or illiquid in the market, and the futures and another option (put) are available, the trader can create the desired payout profile. This expands hedging possibilities – for example, a hedger might combine futures with a put instead of buying an expensive call. Of course, not everyone will do this manually, but market makers constantly evaluate price equivalency: if an option is overpriced relative to a combination of futures and another option, they will sell the expensive option and buy the cheaper synthetic alternative.

In conclusion, understanding synthetic positions is crucial for building arbitrage strategies. It allows finding hidden relationships: futures-option, option-spot, etc. In practice, there is a tight interconnection between the options, futures, and spot markets: prices tend to satisfy the conditions of no-arbitrage. Arbitrage funds and bots monitor these markets simultaneously, executing multiple trades at the slightest deviations. In the next section, we will consider specific examples of arbitrage strategies on BTC and ETH, illustrating the principles outlined.

4. Examples of Arbitrage Strategies on BTC and ETH

Example 1: Cash-and-Carry on Bitcoin

In early 2021, the BTC market was in a state of contango. Suppose, in March 2021, the spot price of Bitcoin was $55,000, and the futures contract for the end of June was priced at $60,000 (a premium of about 9% for ~3 months, which is approximately 36% annually). An arbitrage fund could execute a cash-and-carry strategy: buy, say, 10 BTC at $55k (spending $550k) and simultaneously sell 10 BTC futures contracts at $60k. The total initial costs are $550k (which could be financed with personal funds or credit). Then, regardless of market movements in the spring, by expiration at the end of June, the positions hedge each other. Suppose by the end of June, BTC reaches $70,000 – the purchased BTC can be sold on the spot market for $700k, but the arbitrageur must sell the 10 BTC at $60k per the futures contract (thus missing the growth); they will effectively give their 10 BTC at $60k, receiving $600k. This $600k against the initial $550k gives a profit of $50k, or ~9% over the period. If the price dropped to $50,000, the short futures position would provide a gain (buying BTC at $50k to deliver at $60k, a profit of $10k per unit), while the spot BTC would depreciate on paper, but they would still be sold via the futures contract at $60k. The result would again be $600k against the initial $550k, and the same $50k profit. Therefore, in any case, the arbitrageur earned ~$50k in profit (excluding commissions), effectively “locking in” a 9% price difference. In reality, such opportunities led many firms to engage in this arbitrage – according to BIS, the average return on simple cash-and-carry on BTC and ETH from 2019 to early 2022 was around 10% annually, and the correlation between the basis of BTC and ETH was very high. The chart above shows how the premium for BTC monthly futures fluctuated in Q2 2021: in April, it exceeded 50% annually, but with the market drop by June, it reduced to nearly zero. Arbitrage strategies smoothed these fluctuations: as soon as the premium was high, new short futures were entered (driving futures prices down), and spot purchases were made (raising the basis price), and when backwardation set in July, futures buybacks and spot sales quickly eliminated the negative basis.

Example 2: Put-Call Arbitrage on ETH

Suppose, at some point on the Ether options market, it is discovered that a call option with a strike of $2,000 (expiration in one month) costs 0.12 ETH, and the corresponding put costs 0.08 ETH (premiums are expressed in Ether, as on some exchanges). The spot price of ETH is around $2,000. According to the no-arbitrage condition (put-call parity), ideally, the difference between the call and put prices should roughly equal the difference between the forward price of ETH and the strike price. If the interest rates on USD and ETH are close to zero, the call should cost about 0.08 ETH more than the put (because call – put = S – K in a risk-free valuation). However, here the call is 0.04 ETH more expensive than the put (0.12 – 0.08). The arbitrageur can execute a conversion strategy: buy 1 ETH on the spot (for 1 * $2000), buy a put for 0.08 ETH, and sell the call for 0.12 ETH. Selling the call will bring 0.12 ETH, and buying the put costs 0.08 ETH, so the net result is +0.04 ETH (about $80) as a premium. Now the portfolio consists of: +1 ETH, +1 put (K=2000), -1 call (K=2000). At expiration, the scenarios are: a) If the price of ETH is above $2,000, the put will expire worthless, and the call will be exercised – the arbitrageur must deliver their 1 ETH at $2,000 (the strike price) to the call buyer. They do this, receiving $2,000 in cash. They initially spent $2,000 to buy ETH, and now they get it back. The result is a 0.04 ETH premium profit (which can be converted to $). b) If the price of ETH is below $2,000, the call expires worthless, and the purchased put gives the arbitrageur the right to sell 1 ETH for $2,000. They exercise the right, selling their 1 ETH (purchased earlier for $2,000) at the strike price, receiving $2,000 back. Again, the initial $2,000 is returned, and the profit from the premium is ~0.04 ETH. In both scenarios, the portfolio gives the same risk-free result. Therefore, due to mispriced options, the arbitrageur earned ~$80 without risk. Of course, in practice, commissions and spreads eat into some of the profit, so such opportunities are only realized when there is a significant price imbalance. Such operations on the ETH market are typically automated. Research has recorded occasional small violations of put-call parity on crypto exchanges (e.g., on Binance in 2020-2021), but as the market has matured, these occurrences are rare and corrected quickly.

Example 3: Synthetic Position Transfer (Cross-Exchange Arbitrage)

Suppose a trader holds a long position of 5 BTC on Exchange A as a perpetual futures contract, receiving a +0.01% funding fee every 8 hours (i.e., they pay if the rate is negative, or receive if positive). On another platform, Exchange B, there is a BTC options market. At some point, the trader notices that they can create an equivalent long BTC position on Exchange B by purchasing the necessary call and put options, with effective costs lower than the funding fee on Exchange A. They can then perform a synthetic position transfer: open a synthetic long on B (e.g., by buying 5 at-the-money calls and selling 5 at-the-money puts, thus replicating a 5 BTC long), and on Exchange A, close the perpetual swaps, eliminating the funding fee. If everything is calculated correctly, the exposure to BTC’s price remains the same (5 BTC long), but the hourly funding payments are replaced with a cheaper “payment” for the option combination (in the form of the options’ time value). This cross-platform arbitrage/hedge allows optimizing costs. This was particularly relevant when funding rates on perpetual contracts spiked (for example, in the 2021 bull market, long positions were paying up to 0.1% per day), while the options market could offer a lower implied cost for the equivalent long. Of course, this could only be implemented by advanced players who can evaluate synthetic rates and account for the risk of short-term divergence.

Example 4: Arbitrage on Ethereum After the Merge

As noted, before the Ethereum Merge in September 2022, a unique situation arose: traders expected a PoW chain fork to appear and “free” new ETHW tokens would be given to spot holders. Because of this, ETH futures traded at a large discount to the spot price – the annualized discount reached ~17.7% before the event. The arbitrage strategy involved selling ETH on the spot (locking in the right to receive the new fork tokens) and buying ETH futures expiring immediately after the Merge. In effect, this was a reverse cash-and-carry strategy, but motivated not only by interest considerations but also by the expectation of a fork dividend. After the Merge, spot holders received tokens from the new chain, and futures quickly caught up with the spot price – the discount from ~17% reduced to ~0%. Arbitrageurs who executed this trade profited doubly: from the realized discount (selling higher, buying lower) and from receiving the free ETHW tokens. Of course, such moments are rare and involve technological risks, but they demonstrate the variety of arbitrage opportunities in the crypto market.

Example 5: Simple Cross-Exchange Options Arbitrage

While the focus of the request is on arbitrage between different types of instruments, it’s worth mentioning intra-class arbitrage. For example, BTC options are traded on several exchanges (Deribit, OKX, CME, etc.). If at a given moment an option is significantly cheaper on one exchange than on another (with comparable parameters), an arbitrageur can buy it there and sell it where it is more expensive, locking in the price difference. This direct arbitrage was mentioned earlier. It requires accounting for transaction costs and generally closes quickly due to competition. However, during sharp price movements, discrepancies between exchanges may occur, which arbitrage bots take advantage of.

In conclusion, arbitrage strategies involving cryptocurrency options, futures, and spot markets allow traders to extract profit from pricing inefficiencies while minimizing direct market risk. The most common trades are based on the difference between futures and spot prices (cash-and-carry and reverse), and the relationship between call/put options and the underlying asset (put-call parity). Real examples in the BTC and ETH markets show that at certain times, double-digit annual returns (or significant one-time profits) could be achieved with virtually no risk. However, such opportunities are arbitrage in nature – as soon as enough participants take advantage of them, price discrepancies disappear. As crypto-finance develops, these markets have become much more efficient: large players and algorithms monitor them continuously. However, occasional imbalances still arise due to volatility, regulatory differences, technological events (hard forks, updates), and other factors. For a well-prepared trader, who understands derivatives theory, BTC and ETH options provide opportunities not only for hedging or speculation but also for arbitrage and building synthetic positions, increasing the overall efficiency and maturity of the cryptocurrency market.

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