Bitcoin price is expected to experience volatility as 47% of BTC options expire next Friday
47% of Bitcoin options expire next Friday, which means that BTC could be on the verge of a trend-defining move. Open interest in Bitcoin (BTC) options is only 5% below its all-time high, but almost half of it will disappear in the upcoming September expiration.
Although the current value of $ 1.9 billion in options indicates that the market is healthy, it is still unusual to see such a strong concentration in short-term options. By themselves, the current numbers should not be considered bullish or bearish, but decent sized options that open up interest and liquidity are needed to allow larger players to participate in these markets.
See how BTC’s open interest just crossed the $ 2 billion barrier. Coincidentally, that is the same level that was achieved in the previous two maturities. It is normal (actually expected) for this number to decrease after the monthly settlement. There is no magic level that needs to be maintained, but having options spread out over the months allows for more complex trading strategies to be implemented.
More importantly, the existence of liquid futures and options markets helps support spot (regular) volumes.
Risk aversion is currently at low levels
To determine if traders are paying large premiums for BTC options, it is necessary to analyze implied volatility. Any substantial and unexpected price movement will cause the indicator to rise sharply, regardless of whether it is a positive or negative change.
Volatility is commonly known as the fear index, as it measures the average premium paid in the options market. Any sudden price change often causes market makers to become risk-averse, thus demanding a higher premium for options trading.
BTC fell to its yearly lows at $ 3,637 to quickly regain the $ 5,000 level. This unusual move caused BTC’s volatility to reach its highest levels in two years. This is the opposite of those seen in the last ten days, as BTC’s 3-month implied volatility gave in to 63% from 76%. Although not an unusual level, the justification behind such a relatively low option premium requires further analysis.
We have seen an unusually high correlation between BTC and US tech stocks for the past six months. Although it is impossible to pin down cause and effect, Bitcoin traders betting on decoupling may have lost hope. An average correlation of 80% during the last six months. Regardless of the rationale behind this correlation, it partially explains the recent decline in BTC volatility.
The longer it takes for a relevant decoupling to occur, the less incentive traders have to bet on large movements in the price of BTC. An even more crucial indicator of this is a lack of conviction from traders and this could open the way for more substantial price swings.
There is an unusual concentration of short-term options
Most of the relevant Bitcoin options expire on the last Friday of each month and some concentration is expected on shorter ones due to covered call trades.This strategy consists of buying BTC through spot (regular) or futures markets and simultaneously sell call options. Hedged calls are closer to a fixed income through trading, because the goal is to pocket substantial option premiums in the BTC markets. At expiration, this trader will liquidate his positions in the spot, futures and options markets.
The unusual situation is scheduled to expire on Friday, September 25. By comparison, this is roughly the same amount of open interest for Ether (ETH) options that expire in September and December.
We may never find a reasonable explanation for why BTC options are so concentrated, but a similar phenomenon occurred in June that reduced open interest in BTC options by $ 900 million.
For now, there are no signs of weakness in the options markets, but since Ether options are at $ 450 million, any number below $ 1.5 billion certainly would not seem desirable for Bitcoin.
Disclaimer: This press release is for informational purposes information does not constitute investment advice or an offer to invest. The views expressed in this article are those of the author and do not necessarily represent the views of infocoin, and should not be attributed to, Infocoin.