Market Analysis

Bitcoin Options Open Interest Reaches $2B — Should BTC Traders Worry?

The open interest on Bitcoin (BTC) options contracts has returned to $2 billion after briefly surpassing the level ahead of the July expiry.

Since the beginning of 2020 the BTC options market has grown six-fold and this has led investors to question whether its potential price impact has become too extreme.

Bitcoin options total open interest. Source: Skew

Bitcoin options total open interest. Source: Skew

Just over a third of these contracts are set to expire on August 28 and this is equivalent to 57K BTC. For this reason, traders have every reason to be worried about the expiry’s potential impact on markets, especially when considering there’s a specific time for those settlements.

Chicago Mercantile Exchange (CME) expiry happens at 8:00 am UTC, while Deribit and OKEx at 3:00 pm UTC. There are weekly contracts listed on some exchanges, but the monthly contracts usually handle most of the volume.

Bitcoin options open interest by expiry, measured in thousands. Source: Skew

Bitcoin options open interest by expiry, measured in thousands. Source: Skew

Options are all-or-nothing markets

In futures contracts, even with specific expiry dates, there’s a financial settlement among every buyer (long) and the seller (short). Unless a holder has been previously forcefully liquidated by lack of margin, every contract worth of open interest is settled at expiry.

This statement is not valid for options markets, whereas call (buy) options above expiry price are discarded. The same happens for put (sell) options below the underlying BTC price at maturity. After all, why would someone exercise an option to sell below market level?

Most options will not expire

When analyzing options, the first thing to focus on is the number of days until expiry. A shorter-term implies reduced odds for strikes 10% off market levels. There’s even a technical measure for this probability based on options pricing, known as delta.

Deribit currently holds an 80% market share on Bitcoin options. Therefore, it will be analyzed in detail below.

August 28 call (buy) options. Source: Deribit

August 28 call (buy) options. Source: Deribit

There are 9.9K BTC options open interest at Deribit set to expire next Friday below 25% delta, meaning the market is currently pricing less than 25% odds for those.

As they are commonly referred to, those out-of-the-money options represent over 40% of the call options open interest for August.

August 28 put (sell) options. Source: Deribit

August 28 put (sell) options. Source: Deribit

After a 27% rally past 30 days, most put (sell) options became worthless. There are 17.5K BTC put options open interest under this situation, enticing 85% of August expiry.

When adding both call (buy) and put (sell) options at Deribit there are 46.6k BTC with an August expiry. Nearly 60% of these are deemed out-of-the-money. This dramatically reduces any potential pressure from such a market.

Futures contracts also have a share of responsibility

One should notice that both futures and options markets expire simultaneously, hence it is challenging to identify each derivatives instrument’s responsibility on intense price swings.

Bitcoin futures total open interest. Source: Skew

Bitcoin futures total open interest. Source: Skew

The total BTC futures contracts open interest surpasses $5 billion, although it is common for end of month expiries to reduce such figures for the following two reasons.

Firstly, apart from CME and Bakkt, most exchanges offer perpetual futures known as inverse swaps. Those contracts have no set expiry, and are rolled over every 8h. Currently there is currently $2.44 billion open interest on these instruments.

Even for contracts with a set expiry date, there’s always some activity over the last few days rolling over for upcoming months. Buyers (long) can sell their August positions, simultaneously buying September or October contracts. Short contract holders can do the opposite.

Running the risk of carrying until the expiry date opens a new position on a more distant contract and is very risky, thus, most institutional investors avoid such moves. Even though futures contracts’ open interest seem multiple times larger than options markets, they are quite similar-sized when excluding those perpetual futures.

Keep a close eye on contango

The futures contracts premium, also known as basis, is the best way to interpret how bullish/bearish professional traders are on futures contracts. Futures traders should demand more money than spot (regular) markets to postpone financial settlement.

Bitcoin futures annualized 3-month basis. Source: Skew

Bitcoin futures annualized 3-month basis. Source: Skew

As per the above chart, Bitcoin 3-month futures contracts sustain a healthy 9% annualized premium despite recent failure to maintain a $12,000 level.

Therefore, at the moment, there is not any indication that the $2 billion options expiry could produce a sharp price movement towards expiry.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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