Open interest in Bitcoin’s (BTC) options contracts reached $2 billion after briefly exceeding this level before July’s expiration.
Since early 2020, the BTC option market has grown by six more and this leads investors to wonder whether its potential impact on price will be too extreme.
Just over a third of these contracts will expire on August 28 and this is equivalent to 57,000 BTC. For this reason, traders have every reason to be concerned about the potential impact of the expiration on the markets, especially when you consider that there is a specific time for those settlements.
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The expiration of the Chicago Mercantile Exchange (CME) occurs at 8:00 am UTC, while on Deribit and OKEx at 3:00 pm UTC. There are weekly contracts listed on some exchanges, but monthly contracts generally handle most of the market volume.
Options are all-or-nothing markets
In futures contracts, even with specific maturity dates, there is a financial settlement between each buyer (long term) and seller (short term). Unless a holder has previously been forcibly settled for lack of margin, each open interest value contract is settled at maturity.
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This does not occur in the options markets, while call options above the expiry price are discarded. The same applies to put options below the underlying BTC price at expiration. After all, why would anyone have an option to sell below the market level?
Most options will not expire
When analyzing the options, the first thing to consider is the number of days left until the expiration date. A shorter term means less chance of exercise prices below 10% of market levels. There is even a technique for mediating this probability based on the price of the options, known as delta.
Deribit currently accounts for 80% of the Bitcoin option market. Therefore, it will be analyzed in detail below.
There is an open option interest of 9,900 BTC in Deribit that will expire next Friday below the 25% delta, which means that the market currently has a price of less than 25% for those options.
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These are commonly referred to as out-of-the-money options, and represent more than 40% of the open call interest for August.
After a 27% bull run in the last 30 days, most put options are no longer worth anything. There are 17,500 BTC put options in open interest under this situation, representing 85% of the August expiration.
When adding call and put options on Deribit, there are 46,600 BTCs expiring in August. Almost 60% of these are considered out-of-the-money options. This dramatically reduces any potential pressure from that market.