The open interest on Bitcoin (BTC) options contracts has reached a new all-time high (ATH) at $6.5 billion on Dec. 17. That figure shows a three-fold rise from 3 months ago and is proof that the market has grown notably in the past 6-months.
Investors must notice that even though a new all-time high Bitcoin options open interest is a great number, it doesn’t necessarily mean that professional investors are bullish or bearish.
Call options provide buyers with an opportunity to leverage without running the risk of liquidation. Meanwhile, put options are a good way to hedge against a potential future sell-off. Thus, both add to the total open interest seen in the recent figure.
Another interesting fact to analyze is the options profile set to expire over the next month completely differs from longer-term ones. BTC’s 63% bull run since November certainly contributed to this distortion, as $22,000 and higher strikes were not frequent.
Therefore, such a sizeable open interest around $16,000 strike can be explained by pre-rally market levels.
Notice how after the recent rally, a decent volume has gone through $24,000 and $28,000, totaling 14,800 Bitcoin contracts. Unlike the ultra-bullish call options above $32,000, these options are not considered cheap.
This means someone effectively paid up $1,200 for the opportunity to gain Bitcoin for $24,000 on Dec. 25, less than ten days from the expiry. This is ten times more than the $32,000 call option traded.
Although it’s still early to understand how professional traders are positioned for Friday’s Dec. 25 expiry, the premiums paid on these options look excessive for such a short period.
Longer-term options are even more bullish
A completely different pattern emerges when focusing exclusively on longer than 30-day expiries that favor ultra-bullish calls. Unlike short-term ones, these aren’t cheap regardless of requiring 70% or higher upside.
This time around, the $36,000 strike dominates, followed by the incredibly optimistic $52,000 level. Those options need 40% or higher upside to 52,900 Bitcoin contracts, totaling $1.2 billion in open interest.
The biggest open interest position for the $36,000 call option stands at the Jan. 29 expiry. Those traded for as high as $690 a piece recently, thus not a cheap gamble available for anyone.
Instead of gauging investors’ optimism by how high call options have been purchased, investors and traders should turn to the skew indicator. Notice that ultra-bullish options are relatively cheap for 40 to 50 days calendar expiries such as Jan. 25.
Skew shows investors are less bullish
When analyzing options, the 30% to 20% delta skew is the most relevant gauge that compares call (buy) and put (sell) options side-by-side.
A 10% delta skew shows that call options are trading at a premium to the more bearish/neutral put options. On the other hand, a negative skew translates to a higher cost of downside protection, showing bearishness.