The cryptocurrency market is poised for a potentially seismic event as a record-breaking $14 billion worth of bitcoin options contracts are set to expire this Friday. This staggering sum, which represents a whopping 44% of the total open interest for all BTC options across different maturities, marks the largest expiry event ever recorded on Deribit, the world’s leading crypto options exchange.
Significant Open Interest to Expire In-the-Money
As the clock ticks down to Friday’s 8:00 UTC deadline, market participants are keeping a close eye on the 146,000 bitcoin options contracts that are due to expire. Valued at one BTC each, these options carry a notional value of nearly $14 billion, a sum that is sure to have a significant impact on the market.
According to data from Deribit, approximately $4 billion worth of BTC options, or 28% of the total open interest, are currently set to expire “in the money” (ITM). This means that these options are poised to generate a profit for their buyers upon expiration. The question on everyone’s mind is whether these positions will be squared off or rolled over to the next expiry date.
“I suspect a fair bit of open interest in BTC and ETH will be rolled into Jan. 31 and Mar. 28 expiries as the nearest liquidity anchors at the start of the new year,” said Simranjeet Singh, a portfolio manager and trader at GSR.
A Market Leveraged to the Upside
One key factor to consider is the put-call open interest ratio for Friday’s expiry, which currently stands at 0.69. This indicates that for every 10 call options outstanding, there are only seven put options open. The relatively higher open interest in calls, which provide buyers with an asymmetric upside potential, suggests that the market is currently skewed to the upside in terms of leverage.
However, this bullish positioning also raises concerns, as BTC’s upward momentum has stalled in the wake of last Wednesday’s Federal Reserve meeting. Chairman Jerome Powell poured cold water on the idea of potential Fed purchases of cryptocurrencies, while also signaling a more restrained approach to rate cuts in 2025. As a result, bitcoin has shed over 10% of its value, sliding to $95,000 as of this writing.
“The previously dominant bullish momentum has stalled, leaving the market highly leveraged to the upside. This positioning increases the risk of a rapid snowball effect if a significant downside move occurs,” warned Luuk Strijers, Chief Executive Officer of Deribit.
Volatility and Uncertainty Loom Large
As the expiry approaches, key options-based metrics are pointing to a notable lack of clarity regarding potential price movements. The volatility of volatility (vol-of-vol), which measures fluctuations in the volatility of an asset, has been elevated, indicating heightened sensitivity to news and economic data. This could lead to rapid changes in asset prices, requiring aggressive position adjustment and hedging by market participants.
Ethereum, the second-largest cryptocurrency by market capitalization, is also facing a significant options expiry, with contracts worth $3.84 billion set to expire alongside bitcoin. However, the market appears to be more bearish on ETH, which has dropped nearly 12% to $3,400 since the Fed meeting.
“After more than a week of poorer spot performance, ETH’s put-call skew ratio is more strongly bearish (2.06% in favour of puts compared to a more neutral 1.64% towards calls for BTC),” observed Andrew Melville, a research analyst at Block Scholes.
Bracing for Impact
As the cryptocurrency market holds its collective breath ahead of Friday’s historic options expiry, one thing is certain: volatility is on the menu. With billions of dollars worth of contracts set to be settled, and the market appearing to be highly leveraged to the upside, the stage is set for a potentially explosive end to an already tumultuous year.
Market participants will be closely monitoring price action in the coming days, as any significant moves could trigger a cascading effect of liquidations and position adjustments. For those with skin in the game, effective risk management and a keen eye on market sentiment will be essential to navigating the choppy waters ahead.
As the old adage goes, “It’s not about timing the market, but about time in the market.” However, in the fast-paced, high-stakes world of cryptocurrency options trading, timing may very well be everything. As the clock ticks down to Friday’s expiry, one thing is for sure: the crypto market is in for a wild ride.
