Is There Any Reason Why BTC Traders Should Worry About Bitcoin Options Open Interest Reaching $2B 

What Is Bitcoin Options Open Interest? 

Should traders be worried that the majority of August options appear worthless, as open interest on Bitcoin options reached $2 billion? 

After briefly surpassing the level ahead of the July expiry, the open interest on Bitcoin options contracts has returned to $2 billion. 

The fact of the BTC options market is being to be observed to grow six-fold as it is also leading investors to thereby question whether its potential price impact has then become too extreme ever since the beginning of 2020. 

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

Thereby the Chicago Mercantile Exchange expiry is set to happen at 8:00 am UTC, whereas Derbit and OKEx, is at 3:00 pm UTC. Monthly contracts usually handle most of the volume whereas weekly contracts are listed on some exchanges. 

The Options Are All-Or-Nothing Markets

There is a financial settlement among every buyer and seller in futures contracts even with specific expiry dates. Every contract worth of open interest is settled at expiry unless a holder has been previously forcefully liquidated by a lack of margin. 

As call options above expiry price are discarded, this statement is not valid for options markets. For put options below the underlying BTC price at maturity, the same happens. The question here is why would someone exercise the option to sell below the market level? 

Why Most Options Will Not Expire?

The first thing to focus on is the number of days until expiry when analysing options. Implying reduced odds for strikes 10% off market levels are the shorter term. Based on options pricing known as delta, there is even a technical measure for this probability.

Currently, Derbit is holding an 80% market share on Bitcoin options. It will be therefore analysed in detail below.

Set to expire next Friday below 25% delta, there are 9.9K BTC options open interest at Derbit, and this means that the market is currently priced less than 25% odds for those. 

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

Most put options became worthless after a 27% rally past 30 days. 

Enticing 85% of August's expiry, there are 17.5K BTC put options open interest under this situation. 

There are 46.6K BTC with an August expiry when adding both call and put options at Derbit. Here there are nearly 60% deemed out-of-the-money.

From such a market, this dramatically reduces any potential pressure. 

Why Do Futures Contracts Also Have A Share Of Responsibility?

It is challenging to identify each derivatives instrument’s responsibility on intense price swings as one should notice that both futures and options markets expire simultaneously. 

It is common for the end of month expiries to reduce such figures for the following two reasons as the total BTC futures contacts open interest surpasses $5 billion. 

Most exchanges offer perpetual futures known as inverse swaps, apart from CME and Bakkt. Rolled over every 8th, those contracts have no set expiry. On these instruments, there is currently $2.44 billion open interest. 

There is always some activity over the last few days rolling over for upcoming months even for contracts with a set expiry date. 

Simultaneously buying September or October contracts, buyers can sell their August positions. Doing the opposite is short contract holders. 

Most institutional investors avoid such moves as they run the risk of carrying until the expiry date opening a new position on a more distant contract which is very risky. Futures contracts open interest are quite similar-sized when excluding those perpetual futures as they seem multiple times large than options markets. 

It Helps To Keep A Close Eye On Contango

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

Despite recent failure to maintain a $ 12,000 level, the Bitcoin 3-month futures contracts sustain a healthy 9% annualised premium.  

Hence it is known that towards expiry and therefore at the moment, there comes not any indication that the $ 2 billion options expiry then could produce a sharp price movement. 

Summing Up…

As the Bitcoin prices follow sharp movements, the futures contracts are following in suit. Here is the whole description of the current market swings as observed by the BTC.