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18 September 2021
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Ethereum

Split sentiment on ETH options market, data suggests

In brief

  • ETH options OI has been hovering near the all-time high as more derivatives traders have been jumping into the options bandwagon.
  • Options could be a better choice when it comes to risk management.
  • Trading data shows that some options traders seem to eye on longer-dated contracts with a higher strike, while contracts that expire in June remained the most popular.

ETH options in focus

ETH options markets have been getting more attention recently as the second-largest crypto’s risk sentiment has been maintaining mostly positive since late last month. Data from Skew shows that the total ETH options OI was just shy of USD150 mln, almost at the highest levels since Apr 2019.

fxsoriginal

Source: Skew

fxsoriginal

Source: OKEx; Tradingview

ETH’s strong performance could be one of the reasons behind the increasing interest in the ETH derivatives trading activities. The fact that ETH has been outperforming BTC in the past month. As of Jun 8, ETH rallied for about 15% in the past 30 days, while BTC’s value decreased by about 2%.

Advantage of options

Options and futures are two kinds of instruments that are most commonly used in the derivatives space. While two types of contracts may share some similarities, the difference between the two may substantially affect the risk and reward profiles of a trade. Let’s take The closer look at what advantage options trading can provide.

Manageable risk – Options contracts could be less risky than futures, especially from a long perspective. That’s because traders would know the potential loss in advance. On the other hand, futures are valued by their underlying. Therefore it could be challenging for traders to know for sure how much they will gain or lose.

More comprehensive – Options may have the reputation of being complicated. Though, with a wide range of pricing models, options allow skilled investors to capitalize on their views and beliefs more effectively and comprehensively. That’s because factors like the views on the underlying, volatility, and timing projection could all reflect on the trading results.

Flexible on leverage – With different combinations of strike prices and expiration dates, options contracts provide higher flexibility than futures when it comes to leverage. Investors can easily adjust their leverage according to their risk profiles. In futures trading, however, leverage depends only on margin requirements.

Options trading data analytic

One of the beautiful things about options trading is that we can always extract valuable information about the market from the changes in the overall positioning, open interest, and how traders pick their strike prices. This information could be helpful even for retail investors who want to have a glimpse of how professional/institutional traders have seen the markets.

Now, with the ETH prices remained under the 250-mark, what kind of instruments options traders have been using? What’s the time projection they had in mind? What volatility could tell us? Let’s take a look.

More money getting into longer-dated contracts

We noticed that longer-dated contracts have been getting more market attention these days, with the OI on contracts that expire in July, September, and December, have noticeably increased in the past week.

ETH options OI by expiry

Source: Skew

The increasing OI on longer-dated contracts suggest that some traders could started to take a slightly conservative approach on ETH, especially in a short-term perspective.

That’s because contracts that expire in June with the same strike price can provide higher leverage and lower cost than contracts that expire in December. However, some traders seem to be more open to paying a higher premium to get into an ETH trade.

It’s also worth noting that the OI increase on longer-dated options could also be part of other strategy setups or hedging of other short-dated options.

ETH options strike prices unveil split sentiment

How options traders select their strike price could be another piece of information that is worth looking at. Data from Skew shows that most of the OI was concentrate on contracts with a strike at 220 and 280.

ETH options OI by strike

Source: Skew

From a call perspective, if an investor would like to have less risk exposure, he might select a call option with a strike price at or below the underlying’s spot price. Meanwhile, a trader who wanted to take higher risks may prefer a strike price above the spot of the underlying.

From a put perspective, a put option strike price at or above the spot price is more conservative than a strike price below the spot price.

Given that 220 and 280 seem the most popular strike price in the ETH options markets. From a call point of view, 220 is a conservative choice, as those contacts are already ITM, which means leverage and price swing of these contracts are relatively smaller. However, calls with 280 strike seem for traders who are more bullish on ETH, as those contracts are still OTM; therefore, the leverage of these contracts is higher.

From a put writing point of view, puts with 280 strike look more like a conservative choice for traders who is bearish on ETH prices while more aggressive ETH bears could have picked puts with 220 strike since they have higher leverage and potentially could have higher returns.

To summarize, the expire date and strike price data seem telling us that 1.) Traders seem to have started to consider longer-term setups on ETH, even with a higher premium. 2) Options traders seem to have a split view on ETH prices, as the amount of OI on 220 and 280 strike prices were very close.

Conclusion

Options have been widely used in the traditional financial world. With the rapid growth of the crypto derivatives space, traders and investors are now able to take advantage of the increasing selections underlying in crypto options trading. With OKEx’s latest introduction of the new ETHUSD options trading, traders and investors are now able to hedge risks at a lower cost. Also, OKEx EOSUSD options market is set to open on Jun 18. The add-on will further enrich the OKEx derivatives portfolio.

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