An Analysis of the Deribit Bitcoin Options Market in 2019
Part 2
By Olivier Mammet and Sacha Ghebali
In this article, we follow up on our first analysis[1] of the 2019 Bitcoin options market on Deribit[*]. When first looking at Bitcoin options, we found that short-term ‘At the Money’ Bitcoin options tend to have the highest traded volumes.
This time, we decided to take a deeper look at the trading volume distributions and its relationship with the concept of Moneyness.
Note: For this article, we used traded volume as a first-level indicator of an option’s liquidity.
To summarize our findings:
- Options with the highest traded volumes showed high levels of Moneyness (as per our defined measure) but options with a high measure for Moneyness did not necessarily have a high traded volume.
- There is a clear trading preference for quarterly expiries options (as we already noticed for futures).
- When looking at Calls and Puts with identical strikes and maturities, the ‘Out of the Money’ options have higher traded volume than their ‘In the Money’ counterparts, which is expected in developed markets.
Moneyness
In developed financial markets, Moneyness is an important concept as it has implications on a particular option’s risk profile. It is closely related to an option’s intrinsic value which can be defined as the cash flow that one option holder would receive should he or she exercise the option immediately.
Options can be classified in two ways: ‘In the Money’ or ‘Out of the Money.’ When the strike price of a Call option is above the underlying price of the asset, the option has no intrinsic value and is referred to as ‘Out of the Money’. When the strike price of a Call option is below the underlying price of the asset, the option has positive intrinsic value thus is referred to as ‘In the Money’.
Traders usually add a third case when the strike and underlying prices are equal: the option is referred to as ‘At the Money’.
Of course, an option not yet at maturity has an added ‘speculative’ value which increases with an option’s remaining duration. It is called ‘Time Value’.
At any given time, the value of an option is then the sum of its intrinsic and time values. The notion of ‘Moneyness’ is used to quantify their relative proportions.
In this study, we defined our own measure of Moneyness for listed Bitcoin options and studied trading volumes in our dataset.
1. Recap — Options Volume Analysis
In Table 1, we listed the top 20 options contracts traded (in terms of volume) for our dataset (source: our previous article):
On the other hand, the bottom 61% of all contracts had less than 500 Bitcoin worth traded during the year (source: previous article), Table 2:
2. Defining Measures for ‘Moneyness’
In order to more accurately assess the liquidity of different contracts, we built measures for ‘Strike Moneyness’ and ‘Time Moneyness’ for all options in our dataset. In developed financial markets and under normal market conditions, options with the highest traded volumes tend to be the closest to the money (as defined by the distance between strike and forward price) as well as the closest to expiry date. With our new measures, we tested this hypothesis on our dataset.
For each option contract in the dataset we defined both a Strike Moneyness and Time Moneyness measure:
2.1 Strike Moneyness measure:
Where:
For each trading day we use the average perpetual price for that particular day as an approximation for the Bitcoin forward price on the option’s expiry date.
In particular:
An At the Money (ATM) option whose strike price is equal to the current perpetual price has a Strike Moneyness of 1 while a deep Out of the Money (OTM) or deep In the Money (ITM) option (respectively very unlikely or very likely to be exercised given their strike prices) have a Strike Moneyness that tends to 0.
Example for December 1st, 2019:
- The average traded perpetual price was $7,355
- The $7,500 strike call option had a strike moneyness of:
- The $10,000 strike call option had a strike moneyness of:
2.2 Time Moneyness measure:
In particular:
Our time moneyness measure is equal to 1 on the day of the option’s expiry and closer to 0 as we get further away from the expiry date.
Example for Dec 27th, 2019 (quarterly future expiry date):
- Any call/put option with same day expiry (Dec 27th) has a time moneyness of 1
- Any call/put option with a June 26th, 2020 expiry has a time moneyness of:
2.3 Combined Moneyness measure:
Finally, we define a combined Strike and Time Moneyness measure as the average of the Strike Moneyness weighted by the Time Moneyness spanning all trading days in order to have a first view of our dataset in its entirety.
3. Analysis
We looked at the cumulated traded volume for all option contracts in the dataset as a function of our Strike and Time moneyness. As expected we notice that options scoring high for both measures display high volumes (top right corner on the graph below with cumulated volumes above 6,000 Bitcoin)
We then looked at our combined measure to try to identify specific data points:
As expected, the bottom part of the graph (options with low to no volume reported) concentrates the biggest share of all contracts traded as we had noticed when looking at the cohort sizes (contracts with less than 500 BTC traded over the year representing 61% of the population). On the other hand, the few outliers with high volume also feature high Combined Moneyness (top right quadrant). In particular we find our three most traded contracts (Dec 7500 Call, Dec 7000 Put and Dec 6000 Put) in this area.
Despite showing a clear trend, we still notice that we have a sizable population of options with high Combined Moneyness and low traded volume (bottom right quadrant). We looked at the top 20 contracts ranked by our Combined Moneyness Measure:
We made the following observations:
- A few contracts with January 3rd, 2020 expiry date (in red) have the highest combined moneyness measure but low traded volumes. We can assume that this is due to the preference to trade quarterly expiries (as already seen for futures)
- A similar observation can be made for Dec 20th, 2019 contracts (in green)
- Finally, we see a few contracts clearly In the Money (options likely to be exercised) close to the expiry date (Dec 27 2019 8,250 Put, 8,500 Put and 8,750 Put) (in blue). This shows that when having the choice between two instruments (call and put) with the same strikes and maturity, there will be more volume traded on the Out of the Money one as regularly observed on developed financial markets.
Conclusion
In our previous article we noticed steady trading volumes for Deribit Bitcoin options in 2019 with a wide distribution of volumes among the many listed contracts. From our initial look at the data we noticed that the few contracts with the highest traded volumes tended to be short dated ‘At the Money’ options.
In this follow-up article we decided to test this assumption by defining a measure for Moneyness (both Strike and Time) and looking at trade volumes as a function of our Combined Measure.
We found that:
- Options with the highest traded volumes showed high levels of Moneyness (as per our defined measure) but options with a high measure for Moneyness did not necessarily have a high traded volume.
- There is a clear trading preference for quarterly expiries options (as we already noticed for futures).
- When looking at Calls and Puts with identical strikes and maturities, the ‘Out of the Money’ options have higher traded volume than their ‘In the Money’ counterparts, which is expected in developed markets.
[1] An Analysis of the Deribit Bitcoin Options Market in 2019, Part 1
[*] Kaiko started recording Deribit trade data as of February 26th, 2019
