Open interest on Bitcoin options reached $2 billion but should traders
be worried that the majority of August options appear worthless?
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
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
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
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
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
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
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.
source link: https://cointelegraph.com/news/bitcoin-options-open-interest-reaches-2b-should-btc-traders-worry
