This Friday, at 08:00 UTC, the quarterly expiration of Bitcoin (BTC) and Ethereum (ETH) options contracts on crypto derivatives exchange Deribit is poised to inject bullish price volatility into the market, with billions of dollars at stake.
According to CoinDesk, this event marks one of the largest expiries for Deribit, with $15.2 billion worth of contracts slated for settlement. Bitcoin options dominate the scene, constituting 62% of the total notional open interest set to be settled, amounting to $9.5 billion, while Ether options make up the remaining share.
As these options reach expiry, the total notional open interest across all maturities is expected to diminish by 40% for Bitcoin and 43% for Ether, significantly impacting market dynamics. Deribit’s chief commercial officer anticipates that a substantial portion of these options will expire in the money (ITM), exerting upward pressure on prices or increasing market volatility.
Notably, with Bitcoin hovering around $70,000, approximately $3.9 billion worth of Bitcoin options are poised to expire ITM, representing 41% of the total quarterly open interest. Similarly, 15% of ETH‘s total quarterly open interest, valued at $5.7 billion, is expected to expire ITM, reflecting an unusual level of ITM expiries compared to past cycles and potentially contributing to heightened market volatility.
The concept of “max pain” points to strike prices where the highest number of options would expire worthless, inflicting maximum financial loss on option buyers. For this quarter’s expiry, max pain points are set at $50,000 for BTC and $2,600 for ETH. Historical trends indicate that prices tend to gravitate toward these points before rallying post-expiry, suggesting a potential pattern.
Dealer hedging activities are also poised to impact market dynamics. David Brickell, head of international distribution at FRNT Financial, highlighted dealers’ gamma positioning, indicating that dealers are short around $50 million of gamma, primarily concentrated at the $70,000 strike for Bitcoin. Forced hedging around this level could lead to volatile price swings as the expiry approaches.
Gamma, reflecting the rate of change in an option’s delta, measures sensitivity to changes in the underlying asset’s price. Market makers, aiming to maintain neutral exposure while providing liquidity, may intensify price movements through their hedging endeavors, contributing further to market volatility.
