Investor interest in ether options is stronger than ever, possibly due to excitement surrounding Ethereum’s long-awaited protocol change, dubbed ETH 2.0. 

Data from major exchanges – Deribit and OKEx – shows that open interest in ether options rose to a new lifetime high of $194 million on Tuesday, surpassing the previous record high of $173.4 million reached on June 23, according to data supplied by the crypto derivatives research firm Skew. 

Options are derivative contracts, which give the purchaser the right but not the obligation to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option represents a right to buy, while a put option gives a right to sell. 

The Panama-based Deribit exchange, the world’s biggest options exchange by volume, accounted for nearly 94% of the total open interest of $194 million on Tuesday.

A closer look at the distribution of the open interest as per expiry shows December as the month with the most open interest.

At press time, there are 240,237 open contracts with a notional value of $59 million expiring in December. Meanwhile, the July expiry open interest is 193,919 contracts ($47 million notional), according to Genesis Volatility, an options data platform. 

“Concentration of activity in December expiry suggests traders may be gearing up for ETH 2.0,” said Greg Magadini, CEO of Genesis Volatility, a derivative data platform. 

Read More: Ethereum Turns Five Next Week and We’re Producing a Special Series

Luuk Strijjers, COO of Deribit, told CoinDesk in a Telegram chat that "the bullish momentum in open interest is based on the upcoming ETH 2.0 staking potential.”

ETH 2.0 refers to Ethereum’s long-awaited transition from a proof-of-work (PoW) mechanism to proof-of-stake (PoS). The switch to staking mechanism would help ether holders generate additional yield by staking their tokens in the network. The transition, which was originally expected in the first quarter, now may not happen until early next year.

Even so, investor interest in the cryptocurrency is rising. The number of addresses holding 32 ETH or more — the minimum amount a holder is required to maintain as a balance to become a validator on Eth 2.0 (and hence earn staking rewards) — has increased by over 12% on a year-to-date basis to 123,530, according to data source Glassnode. In addition, ether has gained 90% this year compared to bitcoin’s 30% rise. 

Some investors may be expressing their bullish view on the cryptocurrency by buying call options expiring in December, causing a rise in the open interest. Also, the possibility of investors hedging their long spot positions with long put options cannot be ruled out. After all, the transition has already faced several delays and the cryptocurrency’s price may drop if the upgrade is again pushed out beyond January 2021.

And yet, ETH 2.0 may not be the only reason for the surge in open interest in ether options. “The recent DeFi success and the growing transacted value in stablecoins may have played a role,” Strijjers said. 

Indeed, using ether options as a hedge may be increasing demand. That’s because there are concerns that the frenzy surrounding speculative activities such as “yield farming” in the DeFi space and interconnected leverage would lead to a systemic crisis. Most DeFi projects are based on Ethereum and have witnessed phenomenal growth over the past few months, causing a big rise in the network activity and transitions fees. 

One may argue that investors, in search of yield, may be selling call and put options. That seems unlikely, especially in longer dated options, given the cryptocurrency’s one-month implied volatility is hovering well below its lifetime average of 71%. The metric fell to a multi-year low of 46% on July 3 and has remained largely sidelined ever since according to data source Skew. 

Read More: DeFi Hype Has Sent Ethereum Fees Soaring to 2-Year High: Coin Metrics

Volatility has a positive impact on options’s price and is mean reverting. In other words, there is a good chance of seeing volatility rising in the near term and making options costlier than what they are right now. 

As such, seasoned traders prefer to be option buyers when volatility is low and write options when they think volatility has peaked. 

That said, the possibility of traders having sold July expiry options cannot be ruled out, given the cryptocurrency has spent a better part of the last two months trading the narrow range of $225 to $250.