An Analysis of the Deribit Bitcoin Options Market in 2019
One of the most anticipated developments in the cryptocurrency industry is the growth of the options market. The trading of so-called “plain vanilla” options — European calls and puts with execution limited to their expiration dates — has been available for a few years on venues such as Deribit (2016) [1] and LedgerX (2017) [2].
However, the recent development of a liquid futures market (both perpetual futures and futures with fixed rolling maturities) has made it easier to build more complex derivatives, making options trading possible at a larger scale. Options contracts are beneficial for cryptocurrency markets because they offer traders the ability to hedge against the risk of sudden price changes.
Without getting too deep into the mechanics of options pricing, it is important to understand that in order to properly value an option, a fair estimation of the forward price of the underlying asset is required, which is derived from futures contracts [3]. The development of a futures market with rolling expiry dates has enabled the introduction of accurately priced options with multiple strikes and maturities [4].
In this series of articles, we will try to grasp the current status of the nascent options and futures markets, exploring their challenges, biases and future areas for development. This first article will focus on derivatives trends in 2019, with a detailed look at Deribit. The article will look exclusively at BTC instruments (both futures and options) trading on Deribit during 2019. All datasets and assumptions are limited to this dataset.
Key Takeaways — Deribit 2019
- Bitcoin options trading volumes have been steady, averaging USD 25 million in daily notional value.
- Bitcoin options represent 31.88% of all derivatives volume in terms of USD equivalent notional traded, despite representing only 1.4% of trade count. This is because there is a much bigger median ticket size for options (BTC 1) compared to futures (USD 80).
- The share of quarterly expiry futures volume vs. perpetual future volume is gradually increasing, which is an important pre-requisite for the proper valuation and hedging of options.
- Short term “at the money” Bitcoin options tend to have the highest traded volumes, a sign of market maturity.
- Volumes on options were fairly balanced between calls and puts showing no market bias for a particular side over the course of the year 2019.
1. The State of the Options Market
The cryptocurrency options market is quickly expanding, exemplified by CME’s 2020 launch of options on Bitcoin futures, which marked an important milestone in the industry. The January launch brought in a first day trading volume north of USD 2 million [5]. In addition to CME’s recent launch, more cryptocurrency exchanges are seeking and receiving regulatory approval from the Chicago Futures Trading Commission (CFTC) to list complex derivatives contracts. The increasing sophistication of options markets has the potential to pave the way for an influx of institutional players which could ultimately improve liquidity over time.
Options have been trading on unregulated platforms based outside of the U.S. for a few years, and we now have a large enough sample of data to begin to achieve an understanding of the market in its current state.
In this first article we will analyze Deribit market data, leveraging Kaiko’s historical trade dataset of all instruments traded on the exchange in 2019. We will focus exclusively on derivatives contracts using Bitcoin as the underlying asset.
2. Data Set and Assumptions
To begin this analysis, we use tick-by-tick trade data to gauge the actual traded volumes over the course of the year. Kaiko’s database of Deribit trade data in 2019 [*] reports date, volume, price and type for all trades on the exchange. All trade data used in this report is for BTC instruments throughout 2019.
In aggregate, the studied data set contained the following:
Total trades (futures and options): 26,380,184
Number of different traded instruments: 1,687
The introduction of options with multiple strikes and maturities generates large amounts of data compared to futures only markets. For example, Deribit often lists more than 10 BTC options contracts, each with a unique strike price, expiring on the same date. This translates to a marked increase in instruments available when compared to a futures market, in which there would be only one BTC contract for a given expiration date. As such, the existence of strike prices provides exchanges with another parameter to differentiate and ultimately increase the number of derivatives contracts their users can trade.
For 2019[*] alone, Deribit facilitated trades on 1,687 different instruments on its platform.
2.1 BTC Futures / Options Volume Analysis
Deribit lists a perpetual future contract as well as quarterly expiries (March, June, September, December) with the two front contracts (3 months and 6 months) available at all times while the subsequent one is listed for trading a few days prior to an impending expiration date. In terms of trade count, futures represented by far the most liquid instruments on the platform, accounting for 98.60% of all trades in 2019[*]
Number of futures trades: 26,011,315
Number of options trades: 368,869
Percentage of futures trades in the dataset: 98.60%
However, comparing trade counts gives only a partial view of an instrument’s liquidity due to each contract’s unique specifications. For example, futures have a base nominal of USD 1 per contract while Bitcoin options have a nominal of BTC 1 per contract [6] which makes trade volume comparisons deceptive. In order to better compare volumes, we converted daily Bitcoin options volumes into equivalent USD notional volumes using the following formula:
Having converted Bitcoin options volumes to USD equivalent volumes, we were able to compare aggregated futures and options volumes for 2019[*].
Futures:
Total futures volume for 2019: $28,735,764,434
Daily average futures volume for 2019: $78,728,122
Mean volume future trade: $1,105
Median volume future trade: $80
Options (base nominal):
Total options volume for 2019: BTC 1,119,289
Daily average options volume for 2019: BTC 3,067
Mean volume for options trade: BTC 3.03
Median volume for options trade: BTC 1.00
Options (USD equivalent):
Total options USD volume for 2019: $9,161,101,404
Daily average options USD volume for 2019: $25,098,908
USD volume comparison:
Ratio of options to futures volume for 2019: 31.88%
Despite options being significantly outnumbered by futures in terms of trade count (futures account for 98.60% of all trades), options represented 31.88% of the total USD equivalent notional traded on Deribit (approximately USD 9 billion).
It is interesting to note that in terms of pure futures volume traded during 2019 (USD 28.7 billion over the year with an average of $78 million traded per day), Deribit remained a relatively small player in the field compared to the top two platforms, OKEx and BitMEX, which together averaged around USD 2.5 billion per day over the same period.
Options volume over time:
Looking at the monthly evolution of options volume on Deribit, we notice it has remained relatively stable since March 2019, with monthly transacted volumes of approximately 100,000 Bitcoins.
2.2 Product Segmentation, Futures
When examining the particulars of Deribit futures contracts, we notice that the perpetual contract accounts for the majority of trades and volume throughout 2019:
Ratio perpetual to quarterly expiries, trade count for 2019: 69.32%
Ratio perpetual to quarterly expiries, volume for 2019: 80.49%
Still, we notice an increase in the share of quarterly expiry futures over time with the December 2019 contract capturing almost 10% of the whole market volume while the March 2020 contract captured 5.96%, with three months of trading left until maturity as of December 31st. As mentioned in the introduction, this increase in the share of fixed maturity contracts trading is important for the development of a liquid options market.
2.3 Product Segmentation, Options
2.3.1 Call to Put ratio
When looking at the overall traded Bitcoin options statistics for 2019, we notice a fairly even ratio of calls to puts contracts, with the number of calls offered slightly higher (52.7% vs. 47.2%).
Number of different option contracts: 1,679
Number of different call option contracts: 886
Number of different put option contracts: 793
The ratio is sensibly similar when looking at volume traded for each category of option:
Call options volume (BTC): 596,783
Put options volume (BTC): 522,506
Share of calls to total options volume traded: 53.32%
2.3.2 Contract volumes
We investigate the twenty most traded options contracts for the year in terms of volume. Their combined share of all traded volume is nearly 12%, while representing only 1.2% of traded instruments. Quarterly expiries (option contracts with maturity dates matching futures contracts as opposed to other months) represent almost all the top 20 options traded, with December and September contracts in the top 5. This is expected because the ability to match maturities of derivatives contracts is hugely beneficial in creating a hedged position. This is because any movement of funds associated with the contracts’ settlements is more or less guaranteed to occur simultaneously, limiting unwanted exposure. Also, as expected, these more liquid options have strikes close to the money (December $7,500 Call and December $7,000 Put were the most traded options of the year).
On the other hand, the bottom 61% of all contracts had less than 500 Bitcoins volume traded during the year.
Conclusion
In this first of a series of articles, we examine the trade volume of futures and options on Deribit in 2019. We noticed a clear pattern of volume increasing for quarterly futures expiries as opposed to the perpetual contract. The perpetual contract still attracted 80% of all trades but the trend is in the right direction for the continued maturation of options markets. Ultimately, the existence of a matched maturity futures contract makes it much easier to value and hedge an option. If this trend continues, we would expect to see more participants being comfortable making markets on options, as opposed to engaging purely in speculation
In terms of trade count, options remain a nascent market compared to futures. However, considering the average ticket size (in terms of USD notional equivalent), the difference between the contracts gets much smaller, with options representing more than 30% of all traded volume. We also found that the market did not appear to show a bias towards calls or puts, with balanced volume transacted on both types of instruments.
In our next article, we will dive deeper into options segregation as well as time dynamics on trading, looking at patterns in futures and options combined over time.
[1] Deribit company information
[2] LedgerX company information
[3] Forward price definition on Wikipedia
[4] Deribit futures contract specifications
[5] Coindesk: CME options on futures first trading day review
[6] Deribit option contract specifications
[*] Kaiko started recording Deribit trade data as of February 26th 2019
