Crypto Market Braces for $5.2B BTC and ETH Options Expiry

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As a seasoned analyst with over two decades in the financial markets, I have seen my fair share of market volatility caused by option expiries. However, this upcoming Deribit expiration seems to be particularly intriguing, given the concentration of ITM options for Bitcoin. With my fingers crossed and a keen eye on the charts, I am bracing myself for potential fluctuations in the market.

Based on Deribit’s analysis as a leading market firm, the approaching expiration could cause temporary market fluctuations, particularly in BTC and ETH options contracts valued at approximately $4.2 billion and $1 billion, respectively. These options grant holders the liberty, but not the requirement, to purchase or sell an asset at a predetermined price within a specified time period.

An examination of Deribit’s data shows that approximately $682 million worth of Bitcoin options, accounting for 16.3% of the total $4.2 billion, are expected to be profitable (in-the-money). The majority of these are call options. To break it down, an in-the-money call option implies that the set price is lower than the current market value, making it beneficial for the holder. In contrast, an in-the-money put option has a strike price above the current market price.

Bitcoin’s Market Impact from ITM Options

As an analyst, I find myself observing a high concentration of ITM (In-The-Money) options for Bitcoin, potentially leading to heightened market volatility. When holders of these profitable positions elect to close their bets or reposition themselves, the price of Bitcoin could undergo substantial swings. Remarkably, this pattern bears a striking resemblance to the last quarterly expiry in September, which featured a comparable distribution of open interest.

Data from Deribit shows that as we approach Bitcoin’s expiry, the number of active call options (bullish) is nearly double the number of put options (bearish), with a ratio of 100 calls to 62 puts. This implies a predominantly optimistic market sentiment towards Bitcoin, given its recent surge near $70,000, a level not seen since July.

The highest point where Bitcoin options are likely to expire without value, causing losses for buyers and gains for sellers, is estimated at $64,000. Currently, Bitcoin is being traded around $66,000, above this level. On the other hand, Ether is currently near its max pain level of $2,600, as per the Bitcoin Liquid Index from Brave New Coin.

Supporters of the ‘Max Pain Theory’ believe that Bitcoin could drop further before it expires, while the potential for Ether to decrease seems restricted. As the expiration date nears, traders with short options can influence the price of the underlying asset towards its ‘Max Pain Level’, according to this theory.

The crypto options market has expanded considerably over the past four years. Contracts worth billions of dollars expire every month and quarter, yet it remain relatively small compared to the spot market. According to Glassnode, as of Friday’s data, the spot trading volume was around $8.2 billion, while the options volume stood at approximately $1.8 billion. Additionally, BTC’s open interest of $4.2 billion, set to expire this Friday, is less than 1% of its total market capitalization of $1.36 trillion.

Growing Influence of Crypto Options

Although it’s currently not very large, there’s a strong possibility that the market for options could significantly expand and encompass various other cryptocurrency-related products as more financial institutions become involved. Last Friday, the U.S. Securities and Exchange Commission (SEC) gave the green light to options connected with spot Bitcoin ETFs. This move comes after the approval of option trading for BlackRock’s iShares Bitcoin Trust (IBIT).

Jeff Park, leader of alpha strategies at Bitwise Invest, referred to the SEC’s approval as a “pivotal moment.” He underscored the importance of exchanges offering central guarantors, which platforms such as LedgerX and Deribit currently lack. Additionally, Park expressed enthusiasm, predicting that options trading will be available in the first quarter of 2025.

As a crypto investor, witnessing the approval of ETF-linked options feels momentous. This step could draw in more institutional investors, thereby enhancing the liquidity of the options market significantly. With increased institutional involvement, the influence of massive options expiries on market volatility may become more prominent.

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2024-10-23 18:41