Today the open interest on Chicago Mercantile Exchange Bitcoin (BTC) futures reached a new all-time high at $841 million.
Although this can't be deemed bullish on a standalone basis, it does signal that professional investors' interest in Bitcoin continues to grow at an immense rate.
CME Bitcoin futures open interest in USD terms. Source: Skew
Futures premium provides more useful data
The best way to gauge inventors sentiment on futures contracts is by measuring their premium versus Bitcoin’s market price at spot exchanges. Typically, the indicator should display a 0.5% to 1% premium for 1-month contracts in CME futures.
By postponing the financial settlement date, it is only natural that sellers are required to put up more money.
On the other hand, an excessive premium will create an arbitrage opportunity, as one can sell the futures contract while simultaneously buying the same amount on spot markets. This is a neutral market strategy, commonly known as 'cash and carry.'
CME Bitcoin futures basis, or premium. Source: TradingView
The above chart shows how the basis has consistently held a favorable terrain since mid-March, recently sustaining levels above the 1% premium for ten consecutive days.
A positive basis indicates contango, meaning sellers are demanding more money to postpone settlement.
This situation, known as contango, is the primary indicator of a healthy and bullish derivatives market. This is especially true when open interest increases, as new positions are being created under these ideal circumstances.
CME Bitcoin options markets are growing
CME Bitcoin options markets are relatively new, having just launched in January 2020. It certainly looks modest compared to the leading exchange Deribit, although CME has reached an impressive $440 million open interest in late-June.
Bitcoin options open interest. Source: Skew
The current $171 million CME options open interest carries a trend that has been consistent since its launch, as they are heavily concentrated on call options.
This means investors are able to capitalize on the right to acquire CME Bitcoin futures at a fixed price, also known as a strike.
CME options contracts expire on the last Friday of every month, causing the sharp drops in open interest seen on the chart chart.
As things currently stand, 66% of CME open interest sits on the August 28 expiry, while another 14% is set to mature in late September.
CME options also signal bullishness
Call options are usually related to bullish strategies. However, they are also used for 'covered calls', which are rather neutral and aim to generate a fixed income as long as the underlying asset remains above a certain threshold.
The best way one can spot call options being used for market-neutral strategies is by monitoring to see if the percentage of open interest is well below current market levels.
Spotting this difference is crucial to correctly gauge if call options are being used mostly for bullish or neutral positions.
CME Bitcoin options open interest by strikes. Source: CME
Each CME option contract represents 5 BTC and the most relevant strikes for August and September expiries are expressed in the chart above.
The first thing to note is the absence of volumes below the $10,000 level. Of the current $171 million in CME options open interest, 80% are call options, which is another bullish indicator.
Considering the most significant strike levels of August and September contracts, one can infer those options are mostly being used on bullish strategies.
Broader options markets are bullish
To ascertain whether this positive stance holds on the broader options markets, one should review the total open interest by strike by aggregating every derivatives exchange.
Regardless of whether these are more concentrated on call or put options, a substantial open interest on strikes below market levels is either neutral or bearish.
Aggregate Bitcoin options open interest, in BTC thousands. Source: Skew
There are currently 44,700 BTC open interest below $10,000, totaling $514 million. This figure represents only 28% of the current $1.84 billion aggregate open interest and signals bullishness from options markets and corroborates the CME call options analysis.
Look to the present, not the past
By monitoring derivatives markets, one can gauge professional traders sentiment and better evaluate today's failure to break $12,000 resistance and its subsequent test of $11,150 level.
Both futures and options indicators are signaling bullishness, and thereby should have more importance than charts and trading data from August 2019 markets.
Back then, Bitcoin (BTC) tested $12,000 for a week before declining 20% over the next five days.
Bitcoin (USD) in August 2019. Source: TradingView
Will the pattern repeat this time? That is a good question, and a valid fear for veteran Bitcoin investors familiar with just how volatile the digital asset is.
Fortunately, for bulls, from the perspective of the BTC derivatives markets, there are not compelling signals of bearishness so far.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.