Bitcoin Options Open Interest Hits Record High in Expiry Week

Open interest in bitcoin options has risen to new record highs this week. But the market will witness $1 billion in notional value expiring Friday, which could trigger heightened volatility.

• A record $2.14 billion worth of options contracts were open on Tuesday, up nearly 53% from the multi-month low open interest of $1.14 billion back on Aug. 28, according to data source Skew.
• As of Wednesday, open interest was $2.03 billion.
• The previous record high of $2.11 billion was reached on July 30.
• Options are derivative contracts, which give the purchaser the right but not the obligation to buy or sell the underlying asset at a predetermined rate on or before a specific date. A call option gives its owner the right to buy and a put option gives its owner the right to sell.

• Deribit, the world's largest crypto options exchange, contributed 75% or $1.6 billion of the total open interest of $2.11 billion on Tuesday.
• Meanwhile, the CME, which is considered synonymous with institutional activity, accounted for 13% of the total open positions.
• While open interest has risen to new record highs, trading volumes have remained mostly steady in the $100 million to $200 million range throughout the month.

• "A trend higher in open interest amidst a backdrop of steady volume indicates the concentration of risk behind a specific theme/trade," said Vishal Shah, an options trader and founder of Polychain Capital-backed derivatives exchange Alpha5. "That's not necessarily a bad thing but shows where the market conviction is coalescing."

Monthly expiry

• At press time, there were 89,100 options contracts with a notional value of over $1 billion set to expire on Friday across major exchanges – Deribit, CME, Bakkt, OKEx, LedgerX – according to data provided by the crypto derivatives research firm Skew. 

• Some experts foresee the big expiry adding volatility to the spot price.
• Traders often hedge exposure on loss-making options positions ahead of expiries, putting upward or downward pressure on prices in the spot market.
• "The theory is that the maximum pain point (which is very hard to know or evaluate) of the market will trigger delta hedging of those expired options," Patrick Heusser, senior cryptocurrency trader at Zurich-based Crypto Broker AG, told CoinDesk.
• The maximum pain point is the price at which option buyers would lose the most money and option writers or sellers would profit the most.
• Large institutions are generally net sellers of options and gain from pinning the spot price at the maximum pain point. Depending on the size of the market, they may try to push the spot price ahead of expiry, causing volatility.
• However, bitcoin's options market is quite small compared to the spot market. Hence, the expiry may not have any impact on the spot price.
• Bitcoin's options market saw a total trading volume of roughly $160 million on Wednesday. That's just 0.8% of the spot market volume of $20 billion, according to data source Coingecko.
• "We have seen it too many times in the past that just nothing happened on a big expiry," Heusser said.