Open interest in Bitcoin (BTC) options contracts hit $ 2 billion after briefly exceeding that level before the end of July.
Since the beginning of 2020, the BTC options market has grown by six more and This leads investors to wonder whether the potential price impact will be too extreme.
Total Open Interest of Bitcoin Options. Source: Skew
Just over a third of these contracts They expire on August 28th and that equates to 57,000 BTC. That’s why, Traders have every reason to worry about the potential impact of the decline on the markets, especially considering that there will be a specific point in time for such settlements.
The Chicago Mercantile Exchange (CME) expires at 8:00 a.m. UTC, in Deribit and OKEx at 3:00 p.m. UTC. Weekly contracts are listed on some exchanges, but monthly contracts generally cover most of the market volume.
Open interest in Bitcoin options until expiration. Source: Skew
Options are all or nothing markets
In futures contracts, also with certain expiration dates, There is a financial agreement between every buyer (long term) and the seller (short term). Unless a holder has previously been forcibly liquidated for lack of margin, each Open Interest Value contract is settled on maturity.
This is not the case in the options markets. while the call options above the expiry price are discarded. The same applies to put options that are below the underlying BTC price when they expire. After all Why would anyone have the option to sell below market level?
Most options do not expire
When looking at options, the first thing to do is check the number of days until it expires. A shorter term implies a lower probability of exercise prices below 10% compared to the market level. There is even a technical measure of this probability based on the price of the options called the delta.
Deribit currently accounts for 80% of the Bitcoin options market. Therefore, it will be discussed in detail below.
August 28th call options. Source: Deribit
There is an open interest in 9,900 BTC on Deribit the next Friday expires below the 25% delta, This means that the market for these options is currently below 25%.
These are commonly known as Out-of-the-money options, which represent more than 40% of open positions for call options in August.
August 28th put options. Source: Deribit
After a bull run of 27% in the past 30 days, most put options lost their value. In this situation, 17,500 BTC are open to put options, which is 85% of the term in August.
With the addition of the call and put options for Deribit, 46,600 BTC is due in August. Almost 60% of these are considered out of the money options. This drastically reduces the potential pressure from this market.
Futures contracts also bear part of the responsibility
It should be noted that both the futures and options markets expire at the same time. It is therefore difficult to identify the responsibility of each derivative instrument in the sharp price fluctuations.
Total Open Interest of Bitcoin Futures. Source: Skew
Total open interest in BTC futures contracts exceeds $ 5 billion. Although it is common practice for end-of-month maturities to reduce these numbers for two reasons.
First, Aside from CME and Bakkt, most exchanges offer perpetual futures known as reverse exchanges. These contracts have no fixed expiry and are renewed every 8 hours. There are currently US $ 2.44 billion open positions in these instruments.
Even with contracts with a set expiration date, there will always be some activity in the last few days over the next few months. Buyers (long term) can sell their positions from August and at the same time buy contracts from September or October. Short term contract holders can do the opposite.
Taking the risk of reaching the expiration date by opening a new position in a more distant contract is very risky, which is why most institutional investors avoid these moves. Although the open interest of futures contracts appears to be many times greater than that of options markets, they are quite similar in size when these perpetual futures are excluded.
Keep an eye on Contango
The futures contract premium, also known as the base, is the best way to interpret how bullish / bearish professional traders are in futures contracts. Futures traders should charge more money than spot markets (regular markets) to postpone financial settlement.
Annualized basis for 3-month Bitcoin futures. Source: Skew
According to the graphic above 3-month bitcoin futures contracts maintain a healthy annualized base of 9%, despite recently failing to maintain the $ 12,000 level.
So, There is currently no indication that the expiration of $ 2 billion worth of options could result in a sharp movement in prices as the expiration date approaches.
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