Bitcoin’s $5.8 Billion Quarterly Options Expiration Could Trigger Market Volatility
Quarterly expiration deadline approaching, set for this Friday at 8am UTC time.
As we approach Friday’s expiration of several billion dollars’ worth of Bitcoin and Ethereum options contracts, market participants are bracing themselves for potential price volatility. Deribit’s Luuk Strijers notes that a notable amount of open interest is set to expire ‘in-the-money’, setting the stage for significant market swings.
Options Expiration: A Brief Overview
For those unfamiliar with cryptocurrency derivatives, let’s break down the basics. Options contracts give traders the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) before a certain date (expiration). In the case of Bitcoin and Ethereum options expiring on Friday, a significant portion of open interest is ‘in-the-money’, meaning that holders can exercise their rights to profit from the market’s current price.
Open Interest: A Closer Look
As of writing, 90,000 Bitcoin options contracts worth $5.8 billion are due for settlement alongside $1.9 billion in Ethereum options. Deribit, the world’s leading cryptocurrency options exchange, accounts for over 85% of global activity. Of the total open interest, about 20% is ‘in-the-money’ for both Bitcoin and Ethereum. This positioning sets the stage for market volatility as traders close or roll over their positions.
Volatility Ahead
The upcoming expiration will likely heighten market activity as traders adjust their positions to mitigate potential losses. Rollover of positions means closing existing trades in the upcoming expiry and opening new ones in subsequent expiries to extend holding periods. Profit-making positions are often rolled over, allowing seasoned traders to let winners run.
Bullish Outlook
While some may be bracing for a potential price drop due to the max pain effect, Deribit’s Luuk Strijers suggests that options beyond this week’s expiry exhibit a bullish bias for both Bitcoin and Ethereum. The skew measures pricing for puts relative to calls, which is negative after September expiry. This is a bullish indicator as calls are relatively more expensive than puts.
Max Pain Effect
The max pain theory suggests that option buyers suffer the most loss on expiry at a specific price level. In this case, Bitcoin’s max pain level for Friday’s expiry is $59,000. While some analysts believe the crypto options market is still relatively small to have a meaningful impact on spot prices, the current max pain point does create some potential downward pressure.
What Next?
Despite the upcoming expiration, activity in the months ahead is likely to remain robust. The U.S. SEC’s decision to greenlight options tied to BlackRock’s Bitcoin ETF could accelerate institutional adoption. One of the largest potential drivers of this trend is the options on ETFs, which are still pending approval from OCC and CFTC.
Pricing Suggests Bullish Outlook
The way options expiring in the coming months are priced suggests a bullish outlook. As calls are relatively more expensive than puts, it indicates a higher demand for buying positions, which is consistent with the consensus that the Fed’s renewed rate-cut cycle and similar moves from other central banks will underpin demand for Bitcoin and Ethereum.
Rally Ahead
According to analysts at Birtfinex, the rally could gather pace once Bitcoin tops the $65,200 level. This suggests that despite the upcoming expiration, the market is still leaning towards a bullish sentiment.
In conclusion, while the upcoming options expiration sets the stage for potential price swings, the overall outlook remains bullish. Market participants should remain cautious and adjust their positions accordingly to mitigate potential losses. As we look ahead to the months ahead, it’s clear that institutional adoption will play a significant role in shaping the market’s trajectory.
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