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The record for CME BTC’s open positions shows that institutional investors are optimistic about the Bitcoin price

May 18, 2020

The option markets for Bitcoin (BTC) are finally growing at CME. Cointelegraph reported this week The total volume traded in the past ten days exceeded USD 140 millionWhile institutional investors deepened their purchase options.

The buyer of a call option can buy Bitcoin at a fixed price on a specified date. For this privilege This investor pays an initial premium to the seller of the call option.

CME Bitcoin Options Volumes - USD. Source: Skew

The record for CME BTC’s open positions shows that institutional investors are optimistic about the Bitcoin price
The record for CME BTC’s open positions shows that institutional investors are optimistic about the Bitcoin price

CME – USD Bitcoin option volume. Source: Skew

As the halving of uncertainty became less risk, institutional investors began to build bullish positions. Although the option markets are more complicated than futures trading, investors can use their positions without any settlement risk.

Open interest is a more relevant number

In simple words Open interest is the total number of contracts that market participants have. Imagine a scenario where call options worth $ 70 million are traded one week and reversed the next. Both the buyer and the seller would close their positions and risks. Despite trading at $ 140 million, open interest would be zero for this scenario.

CME Bitcoin Options Open Interest - USD. Source: Skew

Open interest in CME – USD Bitcoin options. Source: Skew

Based on the graph above, the volume recorded in the past two weeks coincided with the open interest. This indicates that No positions have been closed so far. Most of the trading consisted of short-term call option contracts.

CME Bitcoin option contract processing. Source: CME

Processing of CME Bitcoin option contracts. Source: CME

Note that CME shows an open interest in the number of contracts. How Each CME contract includes 5 BTCThe minimum trade for a strike of USD 10,000 is a face value of USD 50,000. This differentiates CME markets from other markets where only 0.10 BTC can be traded..

At the close of May 29, 1,800 call option contracts were traded, which is equivalent to USD 90 million. The term of June 26 is currently 800 open contracts, which corresponds to a nominal value of approximately USD 40 million. Strikes or The expiration price of the contract increased from $ 9,700 to $ 13,000.

What do buyers expect?

These trades are an undeniable bullish indicator for professional investors.. The total cost of building such an impressive exhibition is over $ 5 million. Unfortunately, there is no way to know how many customers were involved.

On the other hand, it can be assumed that such investors have built up short-term bullish positions. CME option contracts are available, ie Bitcoin futures contracts are delivered to the buyer of the call option. However, investors can sell these futures immediately provided market liquidity is outstanding This purchase step indicates a possible long-term market optimism.

What sellers expect

It may seem inappropriate to sell an option with an unlimited disadvantage against a fixed advance. This strategy changes dramatically if the seller previously had Bitcoin or acquired exposure through CME futures.

Such a strategy is called a “covered call option”.This enables investors to limit their profits while lowering their average entry price. This could be interpreted as a short-term bearish trade, but not as a leverage bet..

Monitoring the possible impact of the Bitcoin price

The first thing that retailers need to consider is the CME options schedule. The sales and purchase relationship should also be closely monitored Call options often indicate bullish strategies.

Put / call ratio of bitcoin options. Source: Skew

Share of selling and buying Bitcoin options. Source: Skew

The recent movement of call options in CME caused the indicator to reach the lowest value ever recorded. 88% of the current open interest is currently dominated by call options. Skew’s numbers include LedgerX, Deribit, BAKKT, OKEx and CME.

There is a significant incentive for these call option buyers to increase the price of Bitcoin every time it expires. As far as the seller of covered call options is concerned, there is nothing to be gained if the market is pushed far beyond the exercise price, but is not suppressed either.

With increasing relevance of the option markets possible incentives for additional price pressure at any time.

The views and opinions expressed here are solely those of author and do not necessarily reflect Cointelegraph’s views. Every investment and every trade step involves risks. You have to do your own research when making a decision.