Overall open interest in Bitcoin options (BTC) fell to $ 2 billion, 13% below the all-time high. While open interest is still heavily focused on the Deribit exchange, the Chicago Mercantile Exchange (CME) also hit $ 300 million.
Simply put, option derivative contracts allow investors to buy protection, either upward (call options) or downward (put options). Even though there are more complex strategies, the mere existence of liquid options markets is a positive indicator.
For example, derivative contracts allow miners to stabilize their income which is tied to the price of a cryptocurrency. Arbitrage and market making firms also use the instruments to hedge their trades. Ultimately, highly liquid markets attract larger participants and increase their efficiency.
Implied volatility is a useful and primary metric that can be taken from option pricing. Whenever traders perceive an increased risk of larger price swings, the indicator will move higher. The reverse occurs during times when the price is flat or if smoother price movements are expected.
Volatility is commonly referred to as an indicator of fear, but it is primarily a retrospective measure. The 2019 peak seen on the chart above coincided with the high of $ 13,880 on June 26, followed by a sudden drop of $ 1,400. The most recent peak in volatility in March 2020 came after a 50% drop in just 8 hours.
Indicators signal a crazy price trend in progress
Periods of low volatility are catalysts for more substantial price movements as they indicate that market makers and arbitrage bureaus are willing to sell protection on lower premiums.
Indeed, the increase in the open interest of derivatives leads to greater liquidations in the event of a sudden change in price.
Investors should then focus on the futures markets to assess whether a potential storm is brewing. Growing open interest indicates either a higher number of market participants or the creation of larger positions.
The current $ 4.2 billion of global open interest might be modest from August’s high of $ 5.7 billion, but it is still relevant.
There are several reasons that could prevent a higher figure, including current BitMEX CFTC fees and KuCoin’s $ 150 million hack.
High volatility is another critical factor holding back open interest in Bitcoin derivatives.
Although 57% is the lowest figure in the past 16 months, it still represents a considerable premium, especially for longer-term options. Options and futures have a lot of synergy, as more advanced strategies combine the two markets.
A buyer betting on a strike of $ 14,000 for the March 21 expiration in 160 days must pay a 10% premium. Therefore, the expiration price must rise to $ 15,165 or 34% above the current $ 11,300.
For comparison, Apple shares (AAPL) hold a volatility of 41% over 3 months. Although above the 29% of the S&P 500, the long-term impact compared to the 47% of Bitcoin has striking effects. The same 34% benefit for a March 2021 call option for AAPL shares has a premium of 2.7%.
To put it in perspective, if an APPL stock was priced at $ 11,300, this March 2021 option would cost $ 308. Meanwhile, BTC’s is trading at $ 1150, which is almost four times as expensive.
Bet on $ 20K? Options might not be the best way
While there is an implicit cost to supporting a perpetual futures position for longer periods of time, it has not been a burden. This is because the funding rate for perpetual futures contracts is typically billed every 8 hours.
The financing rate has fluctuated between positive and negative for several months. This results in a net neutral impact on (long) buyers and short sellers who could have held open positions.
Due to its inherent high volatility, Bitcoin options might not be the optimal way to structure leveraged bets. The same March 2021 option cost of $ 1,150 could be used to acquire Bitcoin futures using 4x leverage. This would result in a gain of $ 1,570 (136%) once Bitcoin reaches the same 34% gain required for the option’s breakeven point.
The above example does not invalidate the use of options, especially when developing strategies that include writing calls or puts. Keep in mind that options have a fixed expiration. Therefore, if the desired price range does not occur until the next day, it does not pay off.
For bulls, unless there is a specific price range and timeframe in mind, it seems that for now sticking to perpetual futures is the best solution.
The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You need to do your own research when making a decision.