Anticipating a Near $5 Billion Expiry: Bitcoin and Ether Options in Focus
Options are financial instruments that grant the holder the right to buy or sell an underlying asset at a predetermined price in the future. Traders closely monitor quarterly options expiries as they can have a significant impact on the market.
This upcoming Friday marks the expiration of a total of 1.217 million options contracts for both Bitcoin (BTC) and Ethereum (ETH) on the renowned crypto options exchange Deribit. These contracts have a combined notional value of $4.8 billion. Among these, approximately 10%, or 117,000 contracts, are tied to Bitcoin, while the rest are linked to Ethereum. On Deribit, each options contract corresponds to one BTC or one ETH. The value of these derivative contracts will depend on the performance of the top two cryptocurrencies by the end of the week.
Experienced traders and individual investors alike pay close attention to monthly and quarterly options expirations, recognizing their potential influence on the market before and after settlement.
In the past, quarterly expirations have tended to have the most significant impact in terms of volume and value. For instance, expirations in June totaled $5.4 billion, while March saw $5.2 billion. The current quarter in 2023 is following in the footsteps of its predecessors in terms of significance. According to Luuk Strijers, the Chief Commercial Officer at Deribit:
"This September, $3 billion in BTC options and $1.8 billion in ETH options will expire, with the Max Pain level close to current price levels."
The Max Pain levels for Bitcoin and Ethereum options due in September are $26,500 and $1,650, respectively. Currently, Bitcoin is trading at $26,100, while Ethereum stands at $1,580.
Max Pain represents the point at which options buyers would incur the greatest loss upon expiration. The theory suggests that options writers or sellers aim to keep prices close to the Max Pain point to maximize losses for buyers. They achieve this through buying and selling the underlying asset in the spot or futures markets.
Another crucial aspect of quarterly settlements is the hedging strategies employed by market makers, entities responsible for ensuring liquidity in the order book. Market makers offset their gamma exposure by actively trading the underlying asset as the expiry date approaches. Gamma refers to the rate of change in an option's price relative to changes in the underlying asset's price.
Strijers doesn't anticipate a surge in volatility as the event approaches. He noted:
"In the past month, we have observed stable markets while the Gamma of the September expiries has been gradually increasing over time. The impact of an uneven distribution of Gamma among traders would have resulted in much more volatility compared to what we have seen these days. Therefore, we do not anticipate significant market movements in the coming week."
According to Imran Lakha, the founder of Options Insights, dealers in Ethereum options primarily hold long gamma positions around $1,650-$1,700. This suggests that these levels could act as a stabilizing factor leading up to the expiration. Griffin Ardern, a volatility trader at the crypto asset management firm Blofin, expressed a similar view regarding Bitcoin.
"The likelihood of price stabilization is quite high. The option set to expire on Sep. 29 possesses a very notable positive gamma. As the expiration date draws nearer, the gamma will grow larger and larger, thereby exerting a potent pull on the price," Ardern affirmed. He further stated:
"The quarterly settlement price on Friday is more likely to be in close proximity to the peak gamma exposure levels, which are $26,000-$27,000 for BTC, and $1,500 or $1,650 for ETH."