Pricing of wrapped Bitcoin and Ethereum on-chain options

TL;DR

This paper compares on-chain option prices for wrapped Bitcoin and Ethereum with a Black-Scholes benchmark, revealing systematic price differences influenced by various market factors and providing a framework for on-chain option pricing calibration.

Contribution

It introduces a regime-sensitive volatility model and a data-driven framework to analyze and calibrate on-chain option prices, highlighting persistent discrepancies for wrapped Bitcoin.

Findings

Benchmark prices exceed Hegic quotes on average.

Price spreads increase with order size, strike, maturity, and volatility.

Wrapped Bitcoin options show larger, more persistent spreads than Ethereum options.

Abstract

This paper measures price differences between Hegic option quotes on Arbitrum and a model-based benchmark built on Black--Scholes model with regime-sensitive volatility estimated via a two-regime MS-AR-(GJR)-GARCH model. Using option-level feasible GLS, we find benchmark prices exceed Hegic quotes on average, especially for call options. The price spread rises with order size, strike, maturity, and estimated volatility, and falls with trading volume. By underlying, wrapped Bitcoin options show larger and more persistent spreads, while Ethereum options are closer to the benchmark. The framework offers a data-driven analysis for monitoring and calibrating on-chain option pricing logic.