Key indicator shows: $4 billion in Bitcoin options expiring on January 29 favor bulls

Bitcoin price appears to have lost momentum over the past two weeks, with some analysts believing that bears will be in control for the foreseeable future.

A look at derivatives market data provides a clearer picture of what is happening on the institutional side and how the moves of large players can impact the spot market.

After peaking at $10.6 billion on January 14, open options interest in Bitcoin (BTC) fell to $8.4 billion. On January 29, 47% of open interest will expire.

While $4 billion in options expiring may be significant, it is important to consider that these options are split between calls (neutral to bullish) and puts. Additionally, the opportunity to buy Bitcoin at $52,000 on January 29th may have made sense a few weeks ago, but not so much now.

BTC total open options positions Source: Bybt.com

As shown in the data above, Deribit exchange still maintains an absolute lead with 83% market share. Still, to understand how important this January 29th option is, you have to adjust the data and compare the call and put options around the $32,000 Bitcoin level.

It’s too early to panic

Most exchanges offer monthly options, and some also offer weekly options. On December 25, 2020, $2.4 billion worth of options contracts expired, setting a record for the largest expiration in history. This figure represents 31% of all open positions and shows how options are typically dispersed throughout the year.

Total open BTC options positions at expiration Source: bybt.com

According to data from Bybt.com, there are 107,000 BTC in options expiring on January 29, accounting for 45% of the total open interest in the options market.

It is worth noting that not all options will trade at expiration, as the strike prices of some options sound unreasonable right now, especially considering there are less than 5 days left.

BTC open option positions on January 29, total strike price Source: bybt.com

As Bitcoin hit an all-time high of $42,000, some extremely bullish call options began trading, but as Bitcoin prices adjusted, these short-term options became worthless.

Currently, January 29th calls at $40,000 and above should be ignored. The same can be said for puts at $25,000 and below. These account for 76% of open interest.

According to the data, the total value of call options below $40,000 expiring on January 29 is estimated at $745 million. Meanwhile, the total value of put options above $25,000 is $300 million. Therefore, the adjusted open interest on January 29 is $1.05 billion, and the put-call ratio is 0.40.

Skew shows that market makers are unwilling to take upside risk

Analyzing open interest through trading data is outdated, while the skew indicator monitors options in real time. This indicator is more important because Bitcoin was trading below $23,500 30 days ago. Therefore, open interest close to this level does not indicate bearishness.

The 30% to 20% Delta skew is the most relevant metric when analyzing options. This metric compares call and put options.

A 10% delta skew indicates that call options are trading at a slight premium relative to put options. On the other hand, a negative skew means a higher cost of downside protection, which suggests that traders are bearish.

Deribit Bitcoin options 30-20% delta skew Source: genesisvolatility.io

According to the data shown above, the last time bearish sentiment was seen was on January 10th, when the price of Bitcoin plunged 15%. After the plunge, the 30-20% delta skew reached levels not seen in the past 12 months as bullish sentiment reached 49.

When this indicator is above 20, it reflects market makers and professionals' concerns about possible price increases and is considered bullish. On the other hand, the 0 to 10 range, which has been maintained since January 20, is considered neutral.

While the $4 billion in options expiration may be a cause for concern, nearly 74% of options are already deemed worthless. Regarding the positions of options contracts expiring on January 29, bulls are still in control as the open interest of adjusted call options is much higher.

Bears are quite happy with $32,000

Total open BTC options positions at different strike prices on January 29. Source: Bybt.com

Despite the overall advantage for bulls, puts dominate at expiration between $33,000 and $35,000. All in all, as things stand, bulls appear to be in full control heading into Friday’s expiration, although incentives are reasonably balanced between $28,000 and $35,000. Overall, there isn’t much to gain on either side until January 29, increasing volatility. (Cointelegraph)