Institutional Demand Drives Growth in Crypto Options Market, Surpassing $40 Billion in Bitcoin Options

The crypto options market is growing, and it’s becoming an essential tool for investors. According to Dennis Ehlert, it helps them create tailored strategies for hedging, leverage, and generating yield.

As the cryptocurrency landscape matures, more institutions, corporations, and even governments are getting involved. This shift makes the crypto options market increasingly important. It allows investors to deploy custom strategies while gaining valuable insights into market sentiment.

Crypto options are mainly offered through two channels: centralized exchanges and the over-the-counter (OTC) market. Recent data from platforms like Deribit, CME, and OKX shows that total listed bitcoin options have hit new highs, exceeding $40 billion in late November.

However, ether options are lagging behind. Open interest for ether stands at $9.8 billion, down from a peak of $14.5 billion in March. Deribit leads the market, accounting for nearly 90% of the total open interest in bitcoin, ether, and altcoins.

The open interest data from Deribit indicates a positive outlook for bitcoin options. At the beginning of December, there were over $19 billion in call options compared to $9.4 billion in puts. This suggests that the market expects prices to continue rising. Notably, $5 billion of this open interest is in call options with strike prices between $100,000 and $120,000, set to expire in December and March 2024.

The Call-Put skew shows that out-of-the-money calls have higher implied volatility premiums than puts. This indicates strong demand for leverage rather than just downside protection.

Centralized exchanges offer user-friendly platforms and real-time data. They allow individual investors to gauge market sentiment through trading activity and order flow. But institutional investors are increasingly turning to the crypto OTC market. It provides more customized solutions, greater privacy, and the ability to execute larger trades.

Many OTC deals are governed by master agreements, like the ISDA Master Agreement and Credit Support Annex (CSA). These agreements enable highly customized trades with flexible strike prices, expiration dates, and collateral management terms.

For institutions looking to implement bespoke options strategies and invest in yield-generating products, trading OTC options with regulated entities is often the preferred route. Regulated counterparties offer a structured and transparent framework, minimizing counterparty risk and ensuring compliance with legal standards. This approach allows institutions to make large trades without the constraints found on centralized exchanges.

Moreover, using master agreements in OTC transactions provides significant advantages for risk management and flexibility. Institutions can customize trade terms, such as strike prices and expiration dates, while reducing credit exposure through thorough due diligence.

As institutional demand for sophisticated options strategies grows, regulated OTC counterparties will play an increasingly vital role. They offer liquidity, security, and the capacity to manage large positions efficiently and according to specific needs.

Dennis Ehlert brings a wealth of experience in financial services and crypto derivatives. He joined AMINA Bank in September 2021 and is now the Executive Director for Crypto Derivatives Trading. In this role, he oversees the bank's crypto derivatives flow business and liquidity management. Before this, he worked as a Senior Portfolio Manager and Trader at Bantleon Bank AG for seven years. His responsibilities included managing various funds and developing quantitative models for multi-asset allocations.