As Ethereum Options Open Interest Remains High, Brace for Volatility Ahead of Merge

Source: iStock/shwepsa


After a large increase in the open interest (OI) in ethereum (ETH) options contracts over the course of July and the first half of August, warnings have emerged that traders should brace for increased volatility in the nearest term.

Increased volatility will be on the horizon as options traders exit their positions around the time of Ethereum’s Merge, or transition from proof-of-work (PoW) to proof-of-stake (PoS).

At the time of writing, OI in the ETH options market stood at USD 7.17bn, close to its highest for the year, and right around the same level as major peaks in OI seen in May and December of last year, when the ETH market was unusually volatile.

Total ETH options open interest:

Source: Coinglass

As can be expected, volatile prices will likely be seen this time around as well, and with the Merge expected to happen sometime between September 10 and 20, a warning to traders could be warranted.

Meanwhile, volatility is also felt in the ETH futures market, where, at the time of writing, close to USD 130m were liquidated in 24 hours on Tuesday, per data from Coinglass. Although not massive compared to liquidations typically seen during large selloffs and rallies, the ETH liquidations were still far higher than those seen in the larger bitcoin (BTC) market, where only around USD 50m was liquidated.

A liquidation is the forced closing of leveraged positions in the market, and is done by exchanges when traders are unable or unwilling to put up the necessary capital to keep the position open.

ETH total liquidations per day:

Source: Coinglass

ETH has been volatile over the past month, with much larger moves than BTC both to the upside and downside.

According to analysts at crypto research and investment firm Delphi Digital, this could have to do with funding rates in the ETH futures market, which have declined to reach a low of -0.024% on August 27. A level that low has not been seen since June 2021, and was followed by a “massive short-squeeze” the following month, a recent Delphi Digital report said.

Funding rates in the future market is a mechanism developed to keep the pricing of futures contracts in line with spot prices. A negative funding rate means that traders who are short pay those who are long, and vice versa. As such, a deeply negative funding rate means that more traders are looking to go short – a bearish sign for the market.

Source: Delphi Digital

Delphi Digital’s report added that open interest in the ETH futures market has also risen since the market’s “capitulation” in June, with a peak of USD 6.8bn seen on August 13. For the month as a whole, open interest has remained above USD 5bn, “most of which is likely to be short as funding rates have flipped negative from August 14th,” the report said.

At 13:40 UTC, ETH traded at USD 1,564 in the spot market. The token was down more than 1% in a day almost 6% in a week. 
Learn more: 
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