Open interest in Bitcoin options is at an all-time high as increased liquidity suggests that investors remain optimistic about BTC.
Open interest in Bitcoin options reached an all-time high of USD 2.14 billion on September 24, one day before a massive 89,100 contracts, or 47% of the options contracts in existence at that time, were due to expire in the quarter. Options are derivative contracts that give the holder the right (but not an obligation) to buy or sell an underlying asset at a predetermined price, also known as the „strike price“.
When looking at trends in open interest before each monthly and quarterly maturity, there are spikes just before the maturity date, and they have been increasing after each maturity, pointing to increased liquidity in the Bitcoin option market (BTC) and an increasing number of investors participating in it.
Given that the last maturity was the third quarter of 2020, open interest was expected to increase beyond the open interest observed in previous monthly maturities in the same quarter. Cointelegraph discussed this further with Shaun Fernando, the head of risk and product strategy at Deribit, a Crypto Engine currency derivatives exchange, who agreed that „the trend of open interest increasing at each quarterly maturity means a trend of increasing liquidity of options“. Adding:
„The longer a maturity exists, the more open interest can increase as traders take positions in that maturity. The March 2021 maturity was then introduced at the end of June, giving more time for positions to be created as opposed to a daily maturity, which would generally be two days old. Therefore, the quarterly ones are correlated to open interest“.
In addition to the fact that high open interest is related to the liquidity of options and the greater number of market participants, it could also be driven by larger macroeconomic events within the cryptomoney markets, such as DeFi-mania and the long-term effects of Bitcoin’s halving on the markets. Lennix Lai, Financial Markets Director of the OKEx cryptcoin exchange, echoes this assessment by addressing why there is an immediate fall in open interest after maturity:
„Open interest normally correlates with expected uncertainty and events that are expected to have a fundamental impact on the price of the underlying. Therefore, open interest at the September maturity is reasonably higher due to the main event that impacted the industry with Bitcoin’s third halving in May and the general turmoil over DeFi, so a higher open interest reflects investors‘ needs to protect themselves with options over the past few months. The subsequent fall in open interest indicates that the need for such event-based risk management is comparatively less now.
The increasing trend in open interest in BTC options seems to be a positive sign that better things are coming for the cryptomoney derivatives market, according to Lai: „Indeed! The signal of growing open interest potentially reflects that more participants are entering the market. In addition, any additional market stimulus may create an aggressive scenario for BTC options.
Small price movements
Despite the expected price volatility before this expiry, where almost half of all existing Bitcoin option contracts expire, we did not see a significant impact on the price. A major reason for this could be the size of the options/derivatives market compared to the BTC spot market. Although investors expect the options and futures market to grow to a larger fraction of the BTC spot market, which has a market capitalisation of USD 194.11 billion. Lai added that „the influence of price is not so strong as to create a large variation“, adding: „While there is no direct correlation between open interest and the post-price/pre-expiration price in traditional markets, the cryptomoney markets are not being sidelined“.
Apart from this main underlying reason why there is no significant price movement is that the bid-ask relationships have not been strongly skewed to one side. A put contract is an option contract that gives the holder the right to sell a specified amount of an underlying asset at a specified time within a specified duration, while a call contract gives the holder the right to buy the underlying asset under similar conditions. Dan Koehler, Liquidity Manager of OKCoin, a San Francisco-based cryptomoney exchange, elaborated:
„The growing open interest in BTC options can have a fundamental impact on the cash market if there comes a time when there is a large imbalance of positions where the bid-ask relationship is heavily skewed to one side. On such occasions, when the expiration occurs, if the bulk of the in-the-money options are exercised, the contract being assigned will cause the price to move in the BTC at the predetermined strike price, this would put pressure on spot market prices in response.
In-the-money (ITM) options refer to options that have an intrinsic value for investors. An ITM call option means that buyers of the option would have the opportunity to buy the asset below its current market price, while an ITM put option gives buyers the opportunity to sell the asset above its current market price. These are considered to be an „out of the money“ option contract.
The bid/ask ratio has been relatively stable, averaging around 0.7 over the past month, indicating that there is still upward sentiment among investors despite the fact that the BTC cash price contracted by USD 900 at the beginning of the maturity week.
Although these are the main points, there are many factors within the maturity of options that play a role in whether the price of the underlying asset will see a large price movement. Koehler notes that „the concentration of a strike price on the open interest of the 89K contracts“ is another significant aspect: „If the open interest of the strike price does not match the current BTC price, then market makers will have to make less last minute hedging which could result in fixed or slippery strike prices“.
Options impact the spot markets
Apart from the fact that options play a role in knowing the market sentiment near the days when the options expire, they are often also an indicator of this sentiment. Fernando stated that „options may have already had an effect on the underlying asset before settlement“, adding that „options may have already had an effect on the underlying asset before settlement“:
„He added: „In the past we have seen whale trading options that could be used as a leading indicator for the underlying, this effect can be twofold, because the counterparties cover the delta of the underlying, but also because those whales could be looking to extract so much value from the large directional future trades they may be looking to make.“
Options serve several purposes for any type of investor. Risk-averse investors use options as a hedging tool that serves to reduce risk in their portfolios. For speculators, options offer the possibility of low-cost ways to go long or short in the market with limited and calculated downward risk. Options also offer the opportunity for potential gains in any market scenario using flexible and often complex strategies such as spreads and combinations.
BTC options traded on the Chicago Mercantil Exchange are called „Bitcoin futures CME options“. They often signal institutional interest in Bitcoin, which also appears to have increased prior to the September 25 quarterly expiration. Cointelegraph discussed the role of these options with Tim McCourt, the global head of the CME Group’s alternative stock index and investment products, who said:
„Our CME Bitcoin options have got off to a good start this year. Since their launch on January 13, more than 27,000 contacts have been negotiated, equivalent to 135,000 Bitcoins. Our options are designed to help both institutions and professional traders manage Bitcoin spot market exposure, as well as hedge their Bitcoin futures positions.“