The cryptocurrency market is bracing for a possible shake-up this week as major options contracts for Bitcoin (BTC) and Ether (ETH) are set to expire on Friday.
According to For Deribit, a leading market analyst firm, the upcoming expiration could lead to short-term volatility. On Friday at 08:00 UTC, Deribit will see the expiration of BTC and ETH options contracts valued at $4.2 billion and $1 billion, respectively. Options give holders the right, but not the obligation, to buy or sell an asset at a specified price within a certain time period.
A closer look at Deribit data reveals that over $682 million worth of BTC options, representing 16.3% of the $4.2 billion total, are set to expire “in the money” (ITM). Most of them are call options. Simply put, an ITM call option means that the strike price is lower than the current market rate, making it profitable for the holder. Conversely, ITM put options have strike prices above the spot price.
The impact of Bitcoin on the market thanks to ITM options
This concentration of ITM options could inject significant volatility into the market. As option holders with profitable positions decide to close their bets or adjust their positions, the price of Bitcoin may experience notable fluctuations. This scenario mirrors what happened during the last quarterly expiration in late September, which featured a similar distribution of open interest.
Data from Deribit indicates that the put-to-call open interest ratio for Bitcoin stands at 0.62 before expiration. This suggests relatively bullish sentiment in the market. Essentially, for every 100 active calls, 62 puts are open. The trend in calls is understandable, especially since BTC recently approached $70,000 for the first time since July.
Source: Dérabit
Bitcoin’s maximum pain level is identified at $64,000. This is the price at which most options would expire worthless, resulting in losses for option buyers and profits for option writers. At the time of writing, BTC is trading near $66,000, still above the maximum pain level, while Ether is hovering around its maximum pain level of $2,600, according to Brave New Coin . Bitcoin Liquid Index.
After failing to break through its $70,000 cap two days ago, Bitcoin price is quickly approaching its “maximum 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 decline before expiration, while Ether’s downside appears limited. According to the maximum pain theory, traders with short options positions can push the price of the underlying asset toward its maximum pain level as the expiration date approaches.
The crypto options market has grown significantly over the past four years. Contracts worth billions of dollars expire every month and quarter, but they remain relatively small compared to the spot market. According to Glassnode, as of Friday’s data, spot trading volume was around $8.2 billion, while options volume was around $1.8 billion. Additionally, BTC’s open stake of $4.2 billion, which expires this Friday, represents less than 1% of its total market cap of $1.36 trillion.
Source: Glassnode
Growing influence of crypto options
Despite its current size, the options market could grow significantly and expand beyond Bitcoin to include other crypto-related products as more institutions enter the space. The U.S. Securities and Exchange Commission (SEC) approved options related to spot Bitcoin ETFs on Friday. The move follows the approval of trading options for BlackRock’s iShares Bitcoin Trust (IBIT).
Jeff Park, head of alpha strategies at Bitwise Invest, describe SEC approval as “game-changing.” He highlighted the need for trading with central guarantors, which platforms like LedgerX and Deribit do not offer. Park also expressed optimism, saying the options should be available for trading in the first quarter of 2025.
The approval of ETF-linked options marks an important milestone for the crypto market, potentially attracting more institutional investors and increasing the overall liquidity of the options market. As institutional participation increases, the impact of large options expirations on market volatility may become more pronounced.
