24 May 2022

A hedged options market while perp OI surges to new ATH

After a quiet week in the market, we see no noteworthy changes in the sentiment in perps as funding rates still trail at or below neutral, but under the hood BTC denominated open interest has surged to new highs.
After erratic patterns in futures premiums emerged following the May 12th crash, the futures market has calmed down, seeing slightly declining premiums in the offshore market.
*Closed Saturday - Sunday Source: Skew
FTX’s futures basis has trended slightly downwards in the last few days, currently sitting at 3.92%. Nevertheless, the substantial difference in the FTX premium vs. the Binance premium remains intact, as FTX futures currently trade at a 1% annualized premium over Binance. CME’s futures have seen a more volatile pattern but have seen a growth in the last week, narrowing the gap to the offshore market. Parts of CME’s growing basis may be explained by a new rolling period in the futures-based ETFs, with ProShares’ BITO rolling over 1000 May contracts to June contracts on Monday while also experiencing slight net inflows.
Perps are seemingly taking a breather…
After a quiet week in the market, we see no noteworthy changes in the sentiment in perps as funding rates still trail at or below neutral.
Source: Skew
Since the sharply negative funding rate on Binance on May 12th, funding rates have resumed to trailing below the neutral 0.01% level. Five of the 21 funding rate intervals on Binance and Bybit have seen neutral funding rates, while the remaining 16 intervals have seen funding rates below neutral as perps continue to trade at a discount to spot.
…But under the hood leverage is surging
Open interest in perps is once again surging. The BTC denominated open interest has grown by 41,000 BTC since May 15th, leading BTC denominated OI to reach a new all-time high of 290,000 BTC.
Source: Laevitas, Skew
BTC denominated open interest in perps has once again grown towards new highs in an otherwise dull and quiet market. Since bottoming on May 15th, the BTC denominated open interest has grown by 41,000 BTC while bitcoin has traded in a narrow range.The BTC denominated open interest has thus returned to new all-time highs, surpassing the 282,000 BTC high recorded on May 4th. The growing open interest has mostly been accompanied by funding rates below neutral, and the most pronounced growth over the last week has been seen on Bybit (+18%) and Binance (+12%). This could point in the direction of shorts being most the aggressive contributor to the recent growth. Rapid surges in open interest tend to foreshadow large moves in the market. We saw a similar surge leading into the July 26th short squeeze and similar surges coinciding with the March top, the legal tender Tuesday sell-off, and the recent LUNA-related crash. Don’t be surprised if we see surging volatility in the coming days. Buckle up!
Options traders have never been more focused on hedging exposure
Skews tells a story of a remarkably high demand to hedge in the options market, with both short-dated and longer-dated options seeing recent all-time highs.
Source: Skew
The 25-delta skew shows the difference between the implied volatility for put and call options at the same maturity. A positive skew signals a higher demand for put options than call options. The 1mth 25D skew reached a 24-hour average all-time high on May 12th of 24%, surpassing the May peaks from 2020 and 2021. The 6mth 25D skew also shows a strong demand for puts, currently sitting at 12.57% after peaking at 14% on May 22nd. The longer-dated maturities have never been anywhere near the current high levels. On June 1st, 2021, the 6mth skew peaked at 4.75%, while the 6mth skew peaked at 4.15% on April 28th, 2020. These skew levels are unprecedented in the bitcoin options market history, suggesting a very pessimistic outlook among options traders.
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