Ether (ETH) faces its largest options expiry ever on June 25 as nearly $1.5 billion out of $3.3 billion notional open interest (OI) in ETH options will expire. June’s expiry has over 638,000 ETH options contracts in its purview, accounting for 45% of the total open interest in these options.
Although it’s the largest options expiry in the history of the derivative product, the open interest in ETH options OI hit its all-time high of nearly $5.5 billion on May 20 soon after ETH had hit its all-time high of $4,362 on May 12.
The huge expiry amid the ongoing market-wide pull is indicative of increased interest in the ETH derivatives market despite the token trading in the $2,270 range, 47.61% lower than its all-time high from mid-May. Luuk Strijers, chief commercial officer of crypto derivatives exchange Deribit, told Cointelegraph:
“The put call ratio for the June expiry is 0.79, which indicates there are more calls outstanding versus puts (64,000 more). This is indeed indicative for bullish sentiment, however, the majority of this OI is held in contracts quite far away from the current ETH price, indicating a low likelihood of expiring in the money.”
Although, Robbie Liu, analyst at the Market Insights team of OKEx — a cryptocurrency exchange — pointed out what this gap in price indicates, “The expiry is still dominated by the bears since a significant amount of call options are a long way off the current price. For example, the largest OI is concentrated in strikes at the mark of $3,200 for call options.”
Call options contracts allow holders to buy Ether at a predetermined price on the date of expiry, while put options contracts allow them to sell Ether under similar pre-requisites. Under usual circumstances, call options are used to supplement bullish strategies, while put options are utilized as hedges against negative price movements of the underlying.
The max pain price for this record expiry is $1,920. This price being the point where the largest number of options are at a loss, it is highly unlikely that the price of ETH will drop more than 10% from its current trading range. Although, as witnessed on May 19, a day now more commonly known as Black Wednesday in the cryptoverse, seasoned investors would never say never.
Strijers further explained the impact of the growing open interest in terms of the number of contracts: “Due to the growing size of our open interest pool, we notice our options expiries are becoming more and more important liquidity and risk transfer events creating a virtuous circle.”
He also added that even though the notional open interest of the ETH options has decreased in terms of United States dollar value due to the decline in the spot price, the open interest measured in contracts has barely been impacted by the price drop. This indicates the sustained interest in the Ether derivatives market despite the price slump.
CME data shows rising institutional demand
The Chicago Mercantile Exchange, the world’s largest derivatives exchange, launched its Ether futures product on Feb. 8 earlier this year. The highly anticipated launch witnessed more than $30 million of volume on the first day of trading on the exchange.
According to a report by OKEx, the launch of CME Ether Futures comes as a “nod of approval” from the most widely used exchange for derivatives products. Richard Delany, a senior analyst from the OKEx Insights team, opined further that, “This does indeed appear to have attracted significant institutional interest to the number two cryptocurrency.”
However, Delany also pointed out that market conditions and context surrounding the launch are quite different when compared to the launch of CME’s Bitcoin Futures in December 2017. The launch of the CME’s Bitcoin (BTC) futures came during an extended bear market when interest in digital currencies had waned across the board, and the product provided exposure to the flagship cryptocurrency for institutions unable to access channels available for retail investors. Delany added:
“In the more than three years since CME BTC futures launched, familiarity with such crypto trading instruments has proliferated, leading to massive growth in both CME BTC futures and their newer ETH counterparts. Despite the recent market correction, interest in cryptocurrency generally remains much greater than in early 2018.”
According to data provided to Cointelegraph by the CME, its Ether futures contract had an average daily volume (ADV) in May of 5,895 contracts, and the average open interest in May is 3,082, which is equivalent to $6.86 million in notional value.
The record trading day for the CME Ether futures contract was on May 19, which amounted to a total of 11,980 contracts, or $26.5 million worth of options. The record for open interest of 3,977 contracts came through on June 1, equivalent to $8.82 million at the current market price of the token.
The large open interest holders (LOIH) in this derivatives contract also hit a high of 45 on May 25, with the average for May being 37 LOIHs. Each LOIH holds at least 25 futures contracts, which are equivalent to 1,250 ETH or $2.7 million in notional value at least at the time of writing. However, Strijers explained why this growth was limited, “CME has realized around $400 million in ETH open interest. Growth of this amount is somewhat limited due to the lack of current yield, which was a big driver for CME volumes.”
However, the spokesperson from CME also mentioned that currently, it doesn’t have a plan to include additional cryptocurrency products like Ether options in their product suite, which includes Bitcoin and Micro Bitcoin futures, Bitcoin options and Ether futures.
Correlation between BTC and ETH
Ether’s correlation with Bitcoin saw a drop in early May to the sub 0.6 levels due to completely independent price movements that Ether made during that period. The one-month correlation was between 0.7 and 0.8 in April before dropping to 0.5–0.6 in early May, but it rebounded drastically to 0.9 in early June, holding high levels since.
However, in the recent BTC rally to $41,000, ETH showed rather limited price movement, consistently trading in the $2,400–2,500 range throughout the rally, which was driven by the news of El Salvador becoming the first country to accept Bitcoin as legal tender. Liu pointed out, “In the recent past, the rebound of ETH has not gained as much momentum as BTC, with the price of ETH/BTC having fallen 20% since its June 7 high.”
Since the positive price trend for BTC before May 16, Bitcoin has been steadily dropping to around the $35,500 mark, dragging ETH along with it to trade in the $2,200 range, which amounted to a 6% drop in 24 hours. Liu mentioned why ETH could take longer to rebound from the ongoing price slump than BTC:
“If we look back to the beginning of 2018, ETH likewise set its all-time high price a month after BTC topped out. And then ETH/BTC experienced a two-month decline before the trend reversed. It will take longer for the market to reverse ETH’s momentum.”
However, for the Ethereum network, June brought in improvement in one important aspect: gas fees. The network transaction fees for both Bitcoin and Ethereum hit a six-month low on June 1.
This change occurred in June, nearly two months after the Berlin hard fork took place on April 13, which was the initial step that the network is taking toward addressing the highly concerning gas fee issue that has been plaguing the network for a long time. Liu opined further:
“The constant high gas fees in March and April were clearly a major reason for the transfer of funds to EVMs and sidechains, which led to the total value locked in BSC surging. Also, in the mid-May sell-off, Ethereum gas fees spiking above 1,000 gwei caused DeFi participants to start moving to Polygon.”
Even though the lower gas fees can be purely a result of lesser transactions and congestion in the network rather than a scalability fix to the network, it still brings much-needed relief to investors and decentralized finance users alike.
As the price momentum in the top two cryptocurrencies continues to drop, it will be interesting to observe the changes that this $1.5-billion bear-dominated expiry will bring for the Ethereum network and the price of its token.