Cryptocurrency markets are bracing for potential upheaval this week as key options contracts for Bitcoin (BTC) and Ether (ETH) expire on Friday.
According to According to Deribit, a prominent market analyst firm, the upcoming expiration could lead to short-term volatility. On Friday at 08:00 UTC, Deribit will expiry BTC and ETH option contracts worth $4.2 billion and $1 billion, respectively. Options give the holder the right, but not the obligation, to buy or sell an asset at a specified price within a specified period of time.
A closer look at Deribit's data reveals that over $682 million of BTC options expired “in the money” (ITM), representing 16.3% of the $4.2 billion total. Most of these are call options. Simply put, an ITM call option means the strike price is below the current market rate, resulting in a profit for the holder. Conversely, the strike price of an ITM put option exceeds the spot price.
Impact of ITM options on the Bitcoin market
This concentration of ITM options can create significant volatility in the market. The price of Bitcoin can experience significant fluctuations when option holders with profitable positions decide to close their bets or adjust their positions. This scenario mirrors what happened at the last quarter expiry at the end of September, and the distribution of open interest was similar.
According to Deribit data, Bitcoin's put-to-call open interest ratio before expiry is 0.62. This suggests that market sentiment is relatively bullish. Essentially, for every 100 active call options, there are 62 put options open. The leaning towards calls is understandable, especially considering BTC recently approached $70,000 for the first time since July.
Source: Delavitt
Bitcoin's maximum pain level has been identified as $64,000. This is the price point at which most options expire worthless, resulting in a loss for option buyers and a profit for Options All Post writers. At the time of writing, BTC is trading around $66,000, still above the maximum pain level, while Ether is hovering around the maximum pain level of $2,600, according to Brave New Coin. bitcoin liquid index.
Bitcoin price, which failed to break through the $70,000 ceiling two days ago, is rapidly approaching its “biggest pain” point of $64,000. Source: Brave New Coin Bitcoin Liquid Index
Proponents of the maximum pain theory argue that Bitcoin still has room to fall before expiration, while Ether's downside appears to be limited. According to Max Payne theory, a trader with a short position in an option may cause the price of the underlying asset to rise toward the maximum pain level as the expiration date approaches.
The crypto options market has expanded significantly over the past four years. Billions of dollars worth of contracts expire monthly and quarterly, but they are still relatively small compared to the spot market. As of Friday's data, spot trading volume was about $8.2 billion and options trading volume was about $1.8 billion, according to Glassnode. Additionally, BTC's $4.2 billion in open interest, which expires this Friday, is less than 1% of its $1.36 trillion market cap.
Source: Glassnode
The growing influence of crypto options
Despite its current size, the options market is likely to grow significantly and expand beyond Bitcoin to include other cryptocurrency-related products as more institutions enter the space. On Friday, the U.S. Securities and Exchange Commission (SEC) approved options related to the Spot Bitcoin ETF. This decision follows the approval of BlackRock's iShares Bitcoin Trust (IBIT) trading option.
said Jeff Park, Head of Alpha Strategy at Bitwise Invest. explained The SEC's approval is “game-changing.” He emphasized the need for exchange with a central guarantor, which platforms such as LedgerX and Deribit do not offer. Park also expressed optimism, saying that options are expected to be available for trading in the first quarter of 2025.
The approval of ETF-linked options is an important milestone for the crypto market, potentially attracting more institutional investors and increasing liquidity in the overall options market. As institutional investor participation increases, the impact of large option expirations on market volatility may become more pronounced.
