Total BTC Options Open Interest. Image credit: Skew
The majority of all relevant options expire on the last Friday of each month. For September, that’s Friday the 25th, when nearly half of the open interest on Bitcoin options, currently at $1.9 billion, will be terminated. Most traders are wondering how (and if) this will affect the price of Bitcoin. In short, most expiration events of this magnitude tend to set the trend for the price, and some volatility is to be expected in the coming days.
First, the Basics
Open interest (OI) is the number of outstanding futures and options in the market at the end of each trading day. For Bitcoin, this is $1.9 billion at the time of writing, according to data from Skew. The all-time high of Bitcoin OI was $2.1 billion on July 31st of this year.
When traders are buying options, they choose between calls and puts. Calls let them buy Bitcoin at what’s called the strike price, or a predetermined price. If the price of the asset rises above the strike price at the point of expiration, the trader profits from the difference between the two. Puts do the opposite: if a trader purchases a put and the price falls below the strike price, they can again profit from the difference by selling BTC at the strike price.
The price for the option itself is called the option premium. Options let traders decide whether they want to exercise it, which protects them in case the price action does not follow their expectations, meaning they only lose the premium.
A popular measure for the expectation of volatility is the fear index. In short, it measures the average premium. Whenever the price of the asset suddenly changes, regardless of the direction of the change, market makers become risk averse and pay a larger premium. In other words, a larger premium implies more volatility.
Second, the Implications
Almost half of all the open interest on Bitcoin options is expiring this Friday. This doesn’t necessarily mean anything bad for the market, since there is no level to be sustained when it comes to options—but large open interest and liquidity enables more complicated trading strategies and is generally well-suited to large players, according to a report by Cointelegraph.
BTC Options Open Interest by Expiry. Image credit: Skew
A similar slashing of more than half the OI at that point happened in June this year, and the price barely moved as over $1 billion in Bitcoin options quietly expired as the largest expiration of its kind—almost 70% of all total open interest.
However, there is very rarely only one reason for price movements. Another big factor is Bitcoin’s implied volatility. In the past few days, Bitcoin’s 3-month implied volatility fell from 76% to 63%, likely due to an unusual amount of correlation between US tech stocks and the price of BTC. Traders who recognize this relationship are less likely to expect big changes in BTC price.
Third, the Conclusion
When it comes to price movements, there is no conclusion that can be made with any certainty ahead of time. We only mention two factors here, whereas the market includes infinitely more, and each can have a bigger (or smaller) effect than previously anticipated. What we can tell, however, is that the open interest on Bitcoin options currently indicates a bullish sentiment (a tweet by Skew shows that a number of traders are betting the price of Bitcoin will be way above its all-time high from December 2017 by the end of 2020).
With the lower implied volatility in the past three months, the price may not necessarily soar “to the moon,” as many like to put it. It may simply be a sign of the Bitcoin market maturing, which opens up a whole new world of possibilities for traders, to be discovered as time goes on.