Net Buying Pressure and the Information in Bitcoin Option Trades

TL;DR

This paper investigates how informed traders influence bitcoin options prices, revealing that market maker supply aligns with arbitrage limits and that demand from volatility traders and informed traders significantly impacts option pricing.

Contribution

It provides new insights into the role of informed traders and market makers in bitcoin options markets, highlighting the evolving efficiency of Deribit as an information aggregator.

Findings

Market maker supply aligns with arbitrage limits.

At-the-money options are driven by volatility traders.

Out-of-the-money options reflect informed traders' expectations.

Abstract

How do supply and demand from informed traders drive market prices of bitcoin options? Deribit options tick-level data supports the limits-to-arbitrage hypothesis about the market maker's supply. The main demand-side effects are that at-the-money option prices are largely driven by volatility traders and out-of-the-money options are simultaneously driven by volatility traders and those with proprietary information about the direction of future bitcoin price movements. The demand-side trading results contrast with prior studies on established options markets in the US and Asia, but we also show that Deribit is rapidly evolving into a more efficient channel for aggregating information from informed traders.