Arbitrage Opportunities and Efficiency Tests in Crypto Options

For liquidity providers in the rapidly-growing crypto options market as well as potential institutional investors in crypto options, we test the joint efficiency of the bitcoin options and perpetual futures markets, and likewise for ether, and identify the frequency and magnitude of arbitrage opportunities. We introduce the necessary (fiat-currency-free) put-call parity relationship, including transaction costs, and thereafter develop a variety of strong and weak arbitrage boundaries for crypto option prices. Novel empirical analysis concludes that both bitcoin and ether derivatives markets are broadly evolving to a more efficient state. Longer-dated options (with maturity ≥ 15 days) are notable in that their price efficiency has improved very significantly over time. Bitcoin markets are more efficient than ether and efficiency of both markets shifts closely with prices of perpetual futures. Hence, periods of extreme volatility can result in highly profitable arbitrage opportunities.