Trading Ethereum (ETH) merge? Are the CME Ethereum Options on Micro Futures markets reasonable?

Ethereum Merge Brief Background

Most people are aware of Proof-of-Work (consensus mechanism to validate blocks on the blockchain - this is done with miners solving math problems (work)).  Ethereum, the second largest Crypto Currency is moving from a Proof-of-Work to Proof-of-Stake (consensus mechanism that validates blocks through a validator (like voting) system).  

The main reason for doing this is to get away from miners wasting electricity solving useless math problems to a system that doesn't waste energy on miners.  

One argument against moving to Proof-of-Stake, is that it becomes more about controlling a large number of validator nodes (so in a sense, the larger validators have more say, whereas Proof-Of-Work rewards are more 'fair' as it is randomly distributed.

Either way you look at it being positive or negative, it is an event that can be traded as the current estimated merge date (the date the blockchain switches from Proof-of-Work to Proof-of-Stake) is set for September 14, 2022.

If you believe this is all positive and market hasn't a successful merge yet, then the easiest is to just go long and buy ETH or ETH futures or ETH call options.  You could also have the opposite view and simply sell ETH futures or potentially buy ETH put options.

CME ETH Options tradeable? liquid?

The main thing you want in financial markets is a tight bid-ask spread.  The tighter the spread, the less slippage you will have to give up to put on a position.  Let's evaluate the ETH options:

symbol	spot	expiration
ETH (Options on Micro Futures)	1685	28 days
	bid	ask	mid	distance to mid	% distance to mid
1700 Call	166	185	175.5	9.5	5.41%
1700 Put	202.5	221.5	212	9.5	4.48%

In the above table, you can see the % distance to mid (slippage) is roughly 5% for the At-the-Money options.  That seems like a lot.  Let's compare to a few other.

symbol	spot	expiration
SPX	4228.48
4230 Call	82.1	83.6	82.85	0.75	0.91%
4230 Put	83.8	85.3	84.55	0.75	0.89%

SPX options are just under 1%.  That means the slippage is about 5x for ETH options!  How about something a bit less liquid, like USO:

symbol	spot	expiration
USO	74.06
74 Call	3.5	3.7	3.6	0.1	2.78%
74 Put	3.4	3.6	3.5	0.1	2.86%

USO options are about 2.8%, so ETH options slippage is only about 2x of USO.  Let's look at TSLA:

symbol	spot	expiration
TSLA	890
890 Call	48.85	49.65	49.25	0.4	0.81%
890 Put	42.3	42.95	42.625	0.325	0.76%

TSLA is surprisingly even tighter than SPX at about 0.80%.  For the last one, let's look at BITO as these Bitcoin ETF options have become more popular:

symbol	spot	expiration
BITO	13.08
13 Call	1.04	1.09	1.065	0.025	2.35%
13 Put	1	1.03	1.015	0.015	1.48%

BITO options have oughly a 2% slippage.  Making these not as wide as I expected.

Takeaway:

Slippage is a good way to see if something is liquid or not, as it shows how much above you pay for mid price when trading.  From the below chart, the ETH (CME options) look to be very wide with a slippage at almost 5%.  I'm not your financial advisor, but if you believe Bitcoin would be a reasonable proxy for the Ethereum merge, then maybe trading BITO options would be a reasonable alternative, as the slippage / spread is significantly less and more inline with stock ETFs.

	slippage
ETH (CME options)	4.95%
SPX	0.90%
USO	2.82%
TSLA	0.79%
BITO	1.91%