Chinese name: Crypto option/crypto contract position ratio
Definition: The option/contract open interest ratio is the ratio of the total notional value of option contract open interest to the sum of the total notional value of perpetual contract and futures open interest. This ratio can be used to help determine the impact of option market hedging on underlying price changes.
When the ratio is relatively low (≤0.5), the impact of hedging behavior on price changes in the options market is usually insignificant. When the ratio is between 0.5 and 0.9, the impact of hedging behavior is more significant at times of poor market liquidity. When the ratio exceeds 1, except for a few extreme moments (such as large-scale buying/selling without warning), the hedging behavior in the options market has a significant impact on price changes.
Explanation: The profit from an option contract can be decomposed into two parts: the profit from price changes, and the profit from volatility changes.
In the crypto market, many investors use options to gain leverage and profit from price changes. These people are called "directional traders". However, many investors choose to "shield" price changes and focus on gaining profits from volatility changes. These people are called "volatility traders". Unlike futures and perpetual contract traders, options traders' delta exposure is not constant.
Therefore, both "directional traders" and "volatility traders" will have some degree of hedging of delta exposure for take-profit/stop-loss and risk management purposes. For options market makers, frequent dynamic hedging is commonplace. Options traders typically hedge delta risk by buying and selling contracts or spot. Therefore, when the option holdings are large enough, the hedging behavior of option traders will become the main force driving the rise and fall of prices, and the option/contract position ratio reflects the significance of the hedging power of option traders in real time.
