The crypto market has come back to life this year, with Bitcoin (BTC) doubling in value, reportedly due to safe-haven demand, excitement around spot ETFs in the US and dovish expectations from the Federal Reserve.
While most activity initially focused on Bitcoin's spot and futures markets, options tied to the cryptocurrency, which offer a cheap way to bet on a price rise or fall, have gained traction.
In terms of open interest (OI), the BTC options market is now larger than the futures market. According to data source CoinGlass, the US dollar value locked in active options contracts was $17.39 billion at press time, nearly 10% more than the $15.84 billion in open futures interest.
According to Luuk Strijers, Chief Commercial Officer of leading crypto options exchange Deribit, the increased activity in the options market is a sign of market maturity.
“BTC options open interest exceeding futures OI is a clear sign that the market is maturing,” Strijers told CoinDesk. “This shift indicates a growing preference for options as tools for strategic positioning, hedging or access to the recent rise in implied volatility and reflects the evolving complexity of the market.”
A larger options market also means traders must consider the impact of quarterly and monthly settlements, as well as market makers' hedging activities, on spot prices.
Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option gives the right to buy, while a put option gives the right to sell.
Traditionally, options are used to reduce risk, but some speculators use them like futures to increase returns. Bulls typically buy puts to protect against a possible downtrend, while bears use call options to protect against a sudden increase in price. Using options efficiently requires a thorough understanding of the key metrics known as the Greeks – delta, gamma, theta and rho – that influence the price of an options contract.
One possible reason for the growing popularity of options is that they allow traders to hedge and profit not only against the price of Bitcoin, but also against other factors such as volatility or the level of price turbulence and time.
Writing or selling options to take advantage of a market downturn and generate additional return on top of spot market holdings were popular strategies earlier this year. More recently, traders have been buying options to take advantage of the renewed explosion in volatility. Volatility has a positive effect on option prices.
Unlike options, spot and futures markets are one-dimensional and only allow speculation about price direction.
Futures contracts obligate a buyer to pay and a seller to deliver a specific asset at a future date. Futures are generally considered riskier than options because they involve greater leverage and allow traders to control assets of much higher value. This exposes futures traders to excessive losses exceeding the value of their original deposit as well as forced liquidations by exchanges.
UPDATE (November 15, 09:24 UTC): Adds interpretation to heading.
Comments are closed.