Friday could be a very active day for the cryptocurrency market. On Deribit, the world’s largest cryptocurrency options exchange, Bitcoin and Ether option contracts with a total value of $15.2 billion will expire. Analysts expect high In-the-Money (ITM) options and investors’ hedging activities to create an increase in volatility that could be characterized by sharp price swings, both upward and downward.
Billion-dollar bets move Bitcoin and altcoin markets
A total of $9.5 billion worth of Bitcoin options stand out, accounting for 62% of all open interest. Ether options make up the remaining $5.7 billion. With a volume of $15.2 billion, this will be one of the largest option expirations in the history of the exchange, eliminating 40% and 43% of the total open interest of Bitcoin and Ether in one go.
What is even more striking is that most of the options expiring are “In-the-Money” (ITM). These options are in-the-money because their strike price is below the current market price of the underlying asset (Bitcoin or Ether). According to Luuk Strijers, Deribit’s Chief Commercial Officer, the $3.9 billion ITM option (41% of total Bitcoin open interest) could create upward pressure or increased volatility. A similar situation exists for Ether, with 15% of options expiring being “ITM”.
Investors are trying to protect themselves in the market
Strijers interprets high ITM levels as an indicator of the recent cryptocurrency rally. He expects options expiration to eliminate the downward pressure so far towards the “Max Pain”. Max Pain refers to the price at which option buyers suffer the most losses. Often, option sellers (writers) try to influence the price close to this point to inflict maximum losses on buyers.
David Brickell, Head of International Distribution at Canada-based cryptocurrency platform FRNT Financial, points out another factor that can trigger volatility: Investors act as “Market Makers” trying to maintain a market neutral position by providing liquidity to the market and profiting from the bid-ask spread. so-called investors’ hedging activities. According to Brickell, investors currently hold a negative gamma position of approximately $50 million, with the bulk of this position concentrated around the $70,000 level in Bitcoin.
Gamma measures the change in Delta, which indicates an option’s sensitivity to changes in price. A negative gamma may cause Market Makers to have to buy to protect their positions, causing the price to go up. In summary, tomorrow will be an exciting and possibly volatile week for Bitcoin and Ether. The billion-dollar option expiry on Friday could lead to surprises for investors with both long and short positions.
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