Ethereum Options Traders Jump the Gun as ETH Price Soars to $280

Published at: July 23, 2020

Since the start of the week Ether (ETH) has gained more than 17% and the gains appear to be connected to increasing stablecoin use and the rise of DeFi applications. 

As reported by Cointelegraph, Ethereum network usage surpassed Bitcoin’s, doubling the volume settled over the entirety of 2019.

Another possibly bullish factor in the background is the Ethereum 2.0 final testnet scheduled for August 4. This appears to have investors in a good mood, despite the current rise in gas fees. Over the past week investors rushed to options markets, sending Ether’s open interest to a record-high $230 million.

ETH options open interest. Source: Skew

Oddly enough, some of these options reached an impressive $720 strike for the December 25 expiry, which is rather optimistic given that it requires a 160% upside. 

6,000 of those call options were traded today and another 6,000 call options traded on the September 25 expiry, with strikes ranging from $400 to $880. These trades added over $3.2 million worth of open interest.

Ether surpassing $400 by expiry seems unlikely

What exactly are the odds of the current bets according to the Black & Scholes options pricing model? Deribit exchange presents this information as ‘delta’ and these are the percent-based odds for each strike considering current implied volatility.

ETH December 25 call options delta. Source: Deribit

According to the above data, the $400 strike for December has a 34% chance of occuring, while the most traded $720 strike has a rather small 11% chance according to the options pricing model. 

For this reason, the price paid for each $720 contract has been around 0.025 Ether. The 6,050 options traded today have cost the buyers a mere $42,000, yet it increased open interest by $1.7 million.

The September expiry has even fewer chances

With just over two months until the September expiry, the odds of traders’ $400 ETH optimism are less likely.

ETH September 25 call options delta. Source: Deribit

The same $400 strike now entices an 18% odd according to the Black & Scholes pricing model, whereas the staggering $720 expiry holds a mere 3%. 

As shown above, the options for September expiry are trading below ETH 0.03 apiece so they shouldn’t have the same weight as more modest optimistic strikes.

Put-call ratios can be deceiving

Investors should pay less attention to headlines of options open interest reaching historical highs and focus more on the prices paid for such options. These unlikely strikes above $400 also affect indicators, including the put/call ratio.

ETH options put/call ratio. Source: Skew

On July 22 the ETH put/call open interest was 0.84, favoring call options by 16%. Despite its bullish read, this number could have been inflated by the out of the money (OTM) call options, presenting little odds.

Futures markets provide better indicators

A better way to gauge professional investors appetite is contango. This entails measuring the premium of longer-term future contracts versus the current Ether (ETH) price. 

ETH futures annualized basis. Source: Skew

Such an indicator, also known as basis, recently reached a rather impressive 12% annualized rate. Sustained periods above 10% are not frequent, and were last seen on March 8, right before Ether started a substantial correction on Bloody Monday when Bitcoin dropped below $8,000..

Despite the odds, the bulls might be onto something

Is the excessive optimism caused by the booming DeFi industry causing investors to buy call options with rather dim odds aggressively? 

Most likely, yes, but currently there is no way to ascertain if greater than $400 expiries for September and December are off the table.

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.

Tags
Markets
Ethereum
Altcoin
Market Analysis
Ether Price
Related Posts
Analysts say this key metric suggests an altcoin season is at hand
Bitcoin’s (BTC) 65% recovery from sub-$29,500 on July 20 to a swing high of $48,200 on Aug. 14 took less than a month and helped bring fresh bullish momentum back to the crypto market and to traders who were dreading the prospect of another prolonged bear market. Currently, the BTC rally has stalled out near the $46,000 price level, and this phase of sideways trading is giving altcoins an opportunity to step forward. As shown in the chart below, the total market capitalization of the altcoin market has risen 80% since July 20. Meanwhile, the Bitcoin dominance rate is down …
Nft / Aug. 17, 2021
Ethereum bulls chase $2,200 ahead of Friday’s $230M ETH options expiry
Ether’s (ETH) $1.5-billion monthly expiry on June 25 was slightly favorable for bears, and at the time, Cointelegraph reported that the $2,200 price was critical to eliminate 73% of the neutral-to-bearish put options. However, bulls were unable to sustain their advantage because the expiry price was near $1,950. In the end, the protective put options outnumbered the neutral-to-bullish call options by $30 million. Fast forward to July, and after a noticeable 10% rally, Ether’s price again struggles to sustain the $2,100 support. Bitcoin’s (BTC) negative 3.5% performance could partially explain last week’s price move, but the London hard fork scheduled …
Markets / July 2, 2021
Ethereum bulls may reemerge after March $1.15B ETH options expiry
Over the past two months, the open interest on Ether (ETH) options increased by 50% to reach $3.1 billion, with ETH price gaining 44% in that time period. Ether's price appreciation and the rising options open interest has resulted in a potentially historic $1.15 billion expiry set for March 26. Most exchanges offer monthly exposures, although a few also hold weekly options for short-term contracts. February faced the most significant expiry on record, with $630 million worth of options contracts, and this figure represented 23% of all the open interest at that time. The above data shows that Ether's March …
Markets / March 19, 2021
Here’s why Ethereum, Aave, ALPHA are unfazed by Bitcoin’s latest ‘Elon candle’
Bitcoin (BTC) and altcoins’ markets lost a combined total of up to $602 billion overnight in a shocker brought forth by Elon Musk. The billionaire entrepreneur did an about-turn on his decision to accept Bitcoin for the electric vehicles offered by his company Tesla. He cited environmental concerns, noting that Bitcoin mining requires many fossil fuel burnings, especially coal. Bitcoin prices started falling sharply within the first five minutes of Musk’s tweets in the late hours on Wednesday in the United States. The prices further plunged into the Asia-Pacific session on Thursday, logging an intraday low of $46,000 at one …
Bitcoin Price / May 13, 2021
Ethereum derivatives look bearish, but traders believe the ETH bottom is in
Ether (ETH) rallied 5.5% in the early hours of Nov. 29, reclaiming the critical $1,200 support. However, when analyzing a broader time frame, the 24% negative performance in the past 30 days significantly impacts investors' sentiment. Moreover, investors’ mood worsened after BlockFi filed for bankruptcy on Nov. 28. Newsflow remained negative after the United States Treasury Department's Office of Foreign Assets Control (OFAC) announced a settlement with Kraken exchange for "apparent violations of sanctions against Iran." In a Nov. 28 announcement, the OFAC said Kraken had agreed to pay more than $362,000 as part of a deal "to settle its …
Markets / Nov. 29, 2022