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Let's Talk About Open Interest in Bitcoin Options

In Sept, 24 the open interest for Bitcoin options hit their all-time high of $2.14 billion. It happened just a day before a big quarterly expiry of 89,100 contracts - 47% of existing options contracts at the time.

Options, in the crypto industry, are derivative contracts that give the holder the right (though not an obligation) to purchase or sell an underlying asset at a predetermined price, also known as the strike price.

Of course, before every monthly and quarterly expiry, an open interest (OI) trend is observed. Analysts are searching for the spikes just before the date of expiry, which is incremental after each expiry. These numbers are pointing toward the increased liquidity in the Bitcoin (BTC) options market and the increasing number of investors participating.

Total BTC options open interest. Source: Cointelegraph

It is interesting how the longer an expiry exists for, the more the open interest can increase as traders take positions in that expiry. The next expiry programmed for March 2021, gives more time for creating more positions than a daily expiry. These would generally have two days of existence. Later, quarterlies are correlated in open interest.

Now, the open interest has a fundamental impact on the price of the underlying. This way, the September expiry OI is larger because of the third Bitcoin halving in May and the DeFi hype. The drop in OI in the last months indicates that event-based risk management is comparably smaller now.

The increasing trend of open interest in BTC options adds a positive stimulus to the crypto derivatives market. Each increase in the open interest shows that more participants are entering the market.

Options impact spot markets

Options play an important role in indicating market sentiment near options expiration days and are often an indicator of this sentiment. The past whales' trade options were used as a leading indicator of the underlying. We know that the whales are looking to extract as much value from any large directional future trades they might be looking to execute.

Total BTC CME options open interest. Source: Cointelegraph

Usually, OI serves various purposes for different investors:

- Risk-averse investors use options as a hedging tool to reduce risk in their portfolios.

- Speculators use options as to offer a chance to have low-cost ways for long or short on the market with limited and calculated downside risk.

Also, OI gives opportunities to potentially profit under any market scenario using flexible and often complex strategies like spreads and combinations.

CME options on Bitcoin Futures are a sign of institutional interest in Bitcoin, which also increased leading up to the Sept. 25 quarterly expiry. This year, CME Bitcoin options are stronger this year. Since its January launch, more than 135,000 Bitcoin have traded. The CME options help institutions and professional traders manage spot market Bitcoin exposure.

These opportunities contribute to the increase in price stability currently witnessed for Bitcoin. The constant development crypto infrastructure (trading, risk and portfolio management, and liquidity aggregation systems) are also helping to evolve the price discovery process. These growing developments are creating steadier gradual raises on price impacts due to increasing open interest.