The largest Bitcoin options expiration in history expires on March 26. More than $ 6 billion worth of Bitcoin (BTC) options will expire on exchanges on Friday, and most of these options will be on Deribit. This will be a record expiration in terms of value and number of options – a total of 100,400 Bitcoin options will expire. The previous record was set in January when nearly $ 4 billion in options expired, representing 36% of open interest at the time.
The huge expiration ahead is due to the rapid growth of open interest in the Bitcoin options market. Bitcoin’s OI has seen growth of over 147% since the beginning of the year. The total OI on the top five crypto derivatives exchanges is currently $ 14.01 billion, up from $ 5.67 billion on January 1.
The influence of the options market on the spot market grows
The size of the options market is increasing in both volume and open interest. As a result, the influence this market has on spot markets is also increasing. It is well known that the derivatives market is an important tool for spot market price discovery. For example, in traditional financial markets, the size of the derivatives market is several times the size of the spot markets for assets like gold, stocks, etc.
However, the opposite is the case for Bitcoin: the size of the BTC spot market is several times larger than its derivatives market. But still, investors look to the futures markets for price discovery in various stages and look to the options market to assess the prevailing sentiment. Regarding this, Sam Bankman-Fried, CEO of FTX, a cryptocurrency derivatives exchange, told Cointelegraph:
“BTC derivatives have been the main drivers of the spot markets for years. At least since 2018, derivatives have been trading more spot than spot derivatives ”.
This shift started in 2018 once option volumes started to grow, attracting more investors who wanted to hedge their bets on the futures and spot markets. Cointelegraph further discussed the influence of options markets with Shaun Fernando, head of risk and product strategy at Deribit, the cryptocurrency derivatives exchange. He said:
“The impact of options on the ground is growing as OI and volumes increase. How much influence it has remains to be seen, but there may be momentary price shocks with whale options trading. Options can also be viewed as one of several leading indicators of the spot market. “
Expiration will not result in all options being traded at once, as some of the strike prices seem very unrealistic. The options market is usually an all or nothing game; at maturity, they have a value or are considered totally worthless. They become useless when the underlying asset is trading above the call option strike price or below the put strike price.
To elaborate, “call” options are contracts that allow the option holder the right, but not the obligation, to buy the underlying asset at a predetermined price within a specified period of time. Rather, put options are contracts that give the option holder the right, but not the obligation, to sell the underlying asset at a predetermined price at a specified time. That predetermined price is called the strike price.
Markets could turn bullish after expiration
Over the past week, Bitcoin has seen bearish price movements. It has gone from trading in the $ 60,000 range on March 19 to the $ 50,000 range on March 25. This drop has led investors to question the true value of Bitcoin and wonder if the bull market will come to an end soon.
But this maturity of $ 6 billion could lead to a change in this sentiment. Bankman-Fried further explained that more option writers are comfortable selling the downside than writing the bright side, saying:
“The crypto industry is bullish on crypto (surprise!). You can see this in many ways: from positive futures premiums to perpetual financing rates and US dollar loan rates; this is another sign of that. “
To measure the impact of expiration, it is beneficial to exclude bearish neutral put options that would be active below $ 47,000 and call options with a strike price above $ 66,000, as both appear to be highly unlikely scenarios. This leaves a $ 668 million imbalance in favor of bullish call options, which could dominate sentiment after expiration.
Analyzing the historical price action of Bitcoin when options expire, Twitter user James Viggiano shared an interesting observation that the price generally seems to increase after an expiration. The same is observed for each monthly expiration event from October 2020 to February.
Although an option expiration of more than $ 6 billion seems huge for the Bitcoin markets, it is important to note that almost 43% of these options are no longer in value due to the current price range of BTC. Therefore, in reality, the expiration of the options will be worth much less than what is scheduled to expire.
Robbie Liu, a market analyst at OKEx Insights, the research team at the cryptocurrency exchange OKEx, told Cointelegraph: “The expirations of major options are often accompanied by an increase in spot volatility and the same goes for futures. “.
The maximum pain price for expiration of this option is currently $ 44,000. The maximum pain price is the strike price at which there are the most call and put options. Therefore, this is the price at which the maximum number of market participants will face financial losses. The maximum pain theory implies that the price of an option will gravitate towards the maximum pain price as expiration approaches. Fernando further explained what the maximum pain price means for this specific expiration event:
“The 44k Max Pain creates a small downward pressure force on the spot. Once this pressure expires, there is a greater possibility of an upward movement. Some say it is not a coincidence that we have had big moves in the times of the big expirations of the options. “
Another important aspect to keep in mind is that one-month realized volatility is currently at the lowest level in 2021, and implied volatility levels are the lowest since December 2020. Lower implied volatility suggests higher premiums low, making options cheaper for investors. exchange.
The higher the total options OI for a given asset, the greater the impact it will have on the price of the underlying asset. The high price of pain that is at a low of $ 44,000 puts some bearish sentiment in the market; this is a concern for long-term bulls. Liu further commented on what markets can expect after the expiration of this historic option:
“After each major expiration, the market is, in the short term, free to move again, and since we are in a broader bull market, price appreciation is the most likely outcome at this time. However, the bigger the cryptocurrency market gets, the more correlations it creates with various market segments, making it less predictable. “
Bitcoin continued to see more institutional adoption after Tesla began accepting Bitcoin from American customers as payment for its products. This led to another “Elon candle” on the market, which raised the price by $ 3,000, but decreased the next day. Tesla even publicly rejected Bitcoin’s hard fork, Bitcoin Cash (BCH), leading the token to hit new market lows.
However, the expiration of this option could remove the downward pressure that currently exists in the market and cause the markets to turn bullish again, as the options market is indicative that the markets are still biased towards bulls.