Ether (ETH) options contracts open interest have grown five-fold in the past three months to currently sit at $452 million.
The $112 million set to expire this Friday could have a considerable market impact, although that will depend on the balance between bullish and bearish strategies.
Ether options total open interest. Source: Skew
The above chart shows just how strong the ETH options market has been in the past month.
Although its open interest might seem modest compared to Bitcoin’s (BTC) $1.9 billion options market, ETH options have become more relevant over the past couple of months.
$400 strike dominates volumes
Not every options market strategy is bullish or bearish. The covered call consists of buying the underlying asset while selling a call (buy) option.
The goal here is to profit from a fixed income strategy whenever there is a decent enough premium. Overall this is a neutral-to-positive strategy, and these investors will profit as long as Ether remains above a certain threshold.
Ether options open interest by expiry, measured in thousands. Source: Skew
Even though open interest for options below the $320 strike is considerable, it could have been built over a month ago while ETH traded below $250.
Such in-the-money options mean strikes are 15% or more below the current ETH price, and are commonly used for the above-mentioned covered calls strategy.
There are currently 97K Ether options with a $400 strike, although this includes all calendar expiries until March 2021. By analyzing the upcoming August 28 expiry exclusively, a trader would have a better gauge of investors’ true sentiment.
Friday’s expiry seems well balanced
Deribit exchange currently holds over 90% market share, and for this reason, their Ether markets will be closely analyzed.
Deribit ETH options markets for August 28 expiry. Source: Deribit
The first thing one should note is the balance between call (buy) options and put (sell) options. As Ether price currently hovers near $390, one should focus on the nearest strike levels.
There are currently 27.8K call options, stacked against 31.4K put options at the $380 to $400 range. This means that, at least for the August expiry, there seems to be an even force between bullish and bearish options strategies.
Skew indicator remains slightly bullish
The 25% delta skew indicator measures how much more expensive (or cheaper) a call option is relative to a similar put option. A negative skew indicates that the cost of protection for bullish movements is more costly than for downside price swings.
ETH 3-month options 25% delta skew. Source: Deribit
Such an indicator has been oscillating in the negative terrain since early-July, and despite recent ETH failure to break $440 resistance, there hasn’t been a sentiment change regarding options pricing.
Futures markets are also holding strong
Unlike options markets, futures contracts necessarily have an equal number of longs and shorts at all times.
This is a central characteristic of such derivatives instruments, although the imbalance of leverage used by either side should be reflected on futures contracts premium relative to spot (regular) markets.
Whenever futures contract buyers (longs) are willing to pay more than the current market price for building leverage positions, its premium will exceed a 5 to 10% annualized rate.
This indicator is known as basis and should sustain a positive level on healthy markets. This situation is known as contango, whereas the opposite, or negative basis, indicates backwardation.
ETH 3-month options 25% delta skew. Source: Deribit
After peaking at an impressive 28% level on August 17, ETH futures basis receded as the cryptocurrency began its 9% drop over the next 48 hours. Despite eventually losing the critical $400 support, ETH futures contracts traders seem unfazed by recent price corrections.
The 1-month ETH futures premium stands at a healthy 13% level, indicating sellers are demanding more money to postpone financial settlement.
Ether derivatives remain bullish
Short-term price movements easily stress out many traders, and behavioral economics studies have proven that the mental impacts of losses vastly exceed those of winnings.
The recent 9% drop from $440 should be deemed insignificant after a 200% rally in the past five months.
Regardless of one’s average purchase price, sustaining price corrections, especially after impressive uptrends, is essential to profit and withstand cryptocurrencies’ extreme volatility.
The last thing one should aim for is Dave Portnoy’s weak hands strategy of giving up a week after entering a notoriously volatile market.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.