Academy Trading Ideas Article

ETH Options Market Shows Split Sentiment: Analysis

2020.06.12 Olivia Capozzalo
ETH and EOS options image

In brief

  • Ether (ETH) options Open Interest (OI) has been hovering near its all-time high as more derivatives traders jump onto the options bandwagon.
  • Options could be a better choice when it comes to risk management.
  • Trading data shows that some options traders seem to be eyeing longer-dated contracts with a higher strike, while contracts that expire in June remain 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 remained mostly positive since late last month. Data from Skew shows that the total ETH options OI — the total value of outstanding options contracts that are yet to be settled — is just around $150 million, a new ATH, breaking the previous record of around $80 million in June 2019.

Total ETH options OI reaching ATH. Source: Skew           

ETH’s strong performance over the past month — notably outperforming Bitcoin (BTC) — could be one of the reasons behind the increasing interest in ETH derivatives trading. As of June 8, ETH rallied over 15 percent over the past 30 days, while BTC’s value decreased by about 2 percent over the same period.

ETH outperformed BTC; Source: OKEx, TradingView

Options vs. futures

Options and futures are two kinds of instruments that are most commonly used in the derivatives space. While the two types of contracts may share some similarities, the difference between them can substantially affect the risk and reward profiles of a trade. Let’s take a 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, with options, traders know the potential loss in advance — when a contract reaches expiry, traders have the option to buy or sell at an agreed upon price. With futures, traders take on more risk because they must buy or sell the underlying asset at expiry — the amount that these gain or lose is dependent on the price of the underlying asset.

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 asset, volatility and timing projection could all reflect on trading results.

Flexible on leverage

With different combinations of strike prices (the price at which an asset, for example ETH, can be bought or sold in the future) 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 analysis

Options data lets traders extract valuable information about the market and market sentiment from the changes in overall positioning, open interest and how traders pick their strike prices. 

With current ETH prices remaining under the $250-mark, what kinds of instruments have options traders been using? What’s the time projection they had in mind? What can volatility tell us? Let’s take a look.

More money entering longer-dated contracts

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

ETH options recently launched on OKEx — we take a closer look at the market.
ETH options OI by expiry. Source: Skew

The increasing OI on longer-dated contracts suggests that some traders could have started to take a slightly conservative approach to ETH, especially from 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 worth looking at. Data from Skew shows that most of the OI was concentrated 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, they might select an ETH call option — when the investor has the right to buy ETH on a set date — with a strike price at or below ETH’s current spot price. Meanwhile, a trader who wanted to take higher risks may prefer a strike price above the spot price of ETH.

From a put perspective — when the investor has the right to sell ETH on a set date — a put option strike price at or above the spot price is more conservative than a strike price below the spot price.

From Skew’s data, $220 and $280 are the most popular strike prices in the ETH options markets, while the current spot price is around $240 at press time. From a call point of view, $220 is a conservative choice, as it’s below the spot price, meaning those contracts are already In the Money (ITM) — leverage and price swing of these contracts are relatively smaller.

However, calls with $280 strike seem to be for traders who are more bullish on ETH, as those contracts are still Out of the Money (OTM), in that the strike is higher than the current spot price.

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

Expiry date and strike price data seem to be telling us that ETH options traders a) seem to have started to consider longer-term setups on ETH, even with a higher premium and b) seem to have a split view on ETH prices, as the amount of OI on 220 and 280 strike prices were very close.

Crypto options market expands

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 selection of underlying assets in crypto options trading. 

OKEx’s own options offerings are growing fast — we introduced ETHUSD options trading just last week. EOS will follow soon, with OKEx’s EOSUSD options market set to open later this month.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary

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