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OKEx Short-Dated Crypto Options See Mounting Interest and High Liquidity

2020.07.31 Robbie Liu

The recent bullish market saw open positions in futures as well as in Bitcoin and Ether options hit record highs. By the morning of July 30 UTC, the open interest of Bitcoin options on OKEx had reached an all-time high of $93 million — just three days earlier, the one-day trading volume had also set an all-time high of $55 million, as per data by skew.  

OKEx BTC Options Volumes & Open Interest. Source: skew
OKEx BTC Options Volumes & Open Interest. Source: skew

Options are more flexible and have a broader variety of expiration dates and strike prices as compared to futures, allowing investors to benefit from more customizable contracts. Moreover, given their nature, options are primarily used for risk hedging and strategic portfolio management.

Options as hedging instruments

We commonly see a lot of Bitcoin miners hedging their block rewards using BTC options. With their non-linear profit and loss characteristics, options provide room for investors to grow their returns. In a nutshell, constructing a hedging portfolio with options can help miners protect a minimum return on their mining, all the while retaining the potential for higher returns.

For example, if a coin holder believes that the market is going to go down, they buy a put option. If the price continues to fall, the holder loses money on the coins but continues to make money on the option. If the market rises, the holder makes money on the coins and only loses up to the option’s front or premium cost, since the option is not an obligation. This allows the holder to hedge risk while retaining room for earnings growth in a high volatility market.

Shifting trend toward short-dated options contracts

Recently, however, a shift in market demand can be observed in relation to options, and a Goldman Sachs report echoed this sentiment in relation to U.S stocks: 

“In 2020, volumes in short dated options have increased to record highs. Single stock options with maturities less than 2 weeks now comprise 75% of all maturities.”

In light of these shifting market trends, OKEx, being a market leader striving for user satisfaction, adjusted the expiration rules for options markets on July 24. The main change is the expansion of one-day, two-day and monthly options, where more expiry dates are available for all options contracts traded on the OKEx platform — including BTC, ETH and EOS. 

Short-term options have many advantages, especially for the crypto space. Firstly, the overall leverage in the Bitcoin market is way higher than that in traditional finance, mostly driven by crypto traders’ insatiable appetite for risk. If an option trader wants to increase “leverage,” they can choose options with strike prices that differ greatly from spot prices now, or go with options contracts with much shorter maturities.

Secondly, with the debut of one-day and two-day options, the possible risk/reward combinations for options traders are vastly expanded while premiums remain reasonable and losses can be planned for. Successful day traders can now use the power of accumulation to increase their overall profit as there are many trades to be made in short time frames.

Finally, since theta (a measure of the rate of decline in the value of an option due to the passage of time) or time decay is also the highest for daily options, it means a trader can get a higher return by selling daily options seven times than selling a weekly option once. 

In general, by leveraging short-term options trading strategies, traders can further reduce volatility and take advantage of immediate trading opportunities.

Looking at the open interest, as shown in the screenshot from the morning of July 30, daily options have reached 27% of overall open interest, just behind the quarterly options that expire on Sept. 25. The large buildup of positions validates market interest and also suggests that liquidity in daily options is not a concern.

OKEx BTC Options Open Interest by Expiry. Source: skew
OKEx BTC Options Open Interest by Expiry. Source: skew

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.

OKEx Insights presents market analyses, in-depth features, original research & curated news from crypto professionals. 

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