Key takeaways
- Bitcoin options expiry marks when contracts become void, forcing holders to decide whether to exercise or let them expire.
- Bitcoin options expiry often triggers increased trading activity, leading to significant market volatility and potential price fluctuations.
- Regulated Bitcoin options from exchanges like the Chicago Mercantile Exchange (CME) and Bakkt attracted institutional investors, boosting the maturity and legitimacy of the market.
- Profiting from Bitcoin options expiry involves monitoring open interest, analyzing put/call ratios, hedging positions, and choosing to exercise or close.
Bitcoin options expiry is like a coupon with an expiration date. Before it expires, traders decide whether to use the contract (buy or sell Bitcoin at a set price) or let it expire. Once the expiry date passes, the contract becomes worthless. These expiry dates can impact traders’ behavior and cause price changes in the market, so it’s essential to keep an eye on them.
What is Bitcoin options expiry?
Bitcoin options are contracts that give the holder the right, but not the obligation, to buy or sell Bitcoin at a set price before a specific date.
They expire when these contracts become void.
There are two types of Bitcoin (BTC) options: call options, which allow buying, and put options, which allow selling.
Options expiry, therefore, is simply the date when these contracts become void, meaning the holder must decide whether to exercise the option or let it expire.
Bitcoin options trading began gaining traction in the late 2010s as cryptocurrency markets matured. Initially, it was a niche market, but as Bitcoin’s popularity soared, so did interest in more sophisticated trading instruments like options.
Major exchanges like the Chicago Mercantile Exchange (CME) and Bakkt introduced regulated Bitcoin options in 2020, providing more legitimacy and attracting institutional investors. This evolution has made options trading a vital part of the broader Bitcoin market, influencing price dynamics and trader behavior.
Bitcoin options expiry might sound technical, but understanding it is key to grasping the forces that can move the market. The regular cycles of options expiry are critical moments that can lead to significant shifts in Bitcoin’s price and volatility, making them essential for traders to watch.
Did you know? Bitcoin options typically expire on the last Friday of every month at 08:00 UTC for most exchanges, a common time frame that traders watch closely for potential market impacts.
Market volatility and Bitcoin options expiry
Market volatility refers to the degree of variation in the price of a financial asset over time. In simpler terms, it’s how much and how quickly prices go up and down. It’s often illustrated via the volatility index. Below, you’ll find an example of Bitcoin’s volatility index compared with that of the Japanese yen, both against the US dollar.
As you can see, Bitcoin volatility (illustrated by the BTC/USD pair) averages much higher than that of the JPY/USD pair.
Even the volatility index itself is volatile.
High volatility means prices are changing rapidly within a short period, while low volatility indicates more stable prices. Volatility is a key concept in trading because it affects risk and potential returns.
Bitcoin options expiry can significantly impact market volatility. As the expiry date approaches, traders need to decide whether to exercise them, let them expire or adjust their positions. This often leads to increased trading activity as traders try to hedge their bets or capitalize on potential price movements.
For example, in January 2021, over $3.7 billion worth of Bitcoin options expired, followed by a further $2.37 billion in June of the same year, in both cases leading to a sharp increase in trading volume and notable price fluctuations.
The influence of Bitcoin options expiry on Bitcoin’s price
There is a clear correlation between Bitcoin options expiry and price fluctuations, with significant expiries often leading to notable changes in Bitcoin’s price.
Referring once more to the Bitcoin volatility index (cautiously, as many factors influence the volatility of Bitcoin), we can see that with an approaching $4.7 billion options expiry date in June 2021, the volatility index increased to a high of 5.9% on June 16. This peak has not been matched since that date.
Bitcoin’s behavior around options expiry is both similar to and distinct from traditional markets. In traditional financial markets, options expiry can also lead to increased volatility and trading volume. However, Bitcoin’s unique characteristics, such as its relatively smaller market size and the high level of retail participation, often amplify these effects.
After all, traditional markets, being larger and more regulated, might see less dramatic price swings.
Did you know? Quarterly Bitcoin options expiries tend to have a more significant impact on the market compared to monthly expiries, often leading to more pronounced volatility and price movements.
How to profit from Bitcoin options expiry
Here are four key preparatory steps you should be aware of if you’re looking to dive into Bitcoin options trading around the time of contract expiry:
Monitoring open interest and volume
Open interest refers to the total number of outstanding options contracts that have not been settled. Trading volume is the number of contracts traded within a specific period.
- Example: If the open interest for Bitcoin call options at a $50,000 strike price significantly increases, it may indicate bullish sentiment, suggesting that many traders expect Bitcoin’s price to rise above $50,000. Conversely, a rise in open interest for Bitcoin put options at the same strike price might indicate a bearish sentiment.
Analyzing put/call ratios
The put/call ratio is the number of traded put options divided by the number of traded call options. It helps measure market sentiment.
- Example: A put/call ratio greater than 1 indicates more puts than calls, suggesting bearish sentiment. For example, if the ratio is 1.2, it means traders are placing more bets on the price falling. For instance, in December 2020, a high put-call ratio predicted a bearish sentiment, and Bitcoin’s price indeed saw a correction post-expiry.
Hedging positions
Hedging involves offsetting to mitigate potential losses from adverse price movements.
- Example: A trader holding a long position in Bitcoin might buy put options to protect against a price drop. If Bitcoin’s price falls, the gains from the put options can offset the losses from the long position.
Exercising or closing positions
Exercising an option means using the right to buy or sell the underlying asset at the strike price. Closing a position involves selling the option back to the market.
- Example: If a trader holds a call option with a strike price of $40,000 and Bitcoin’s current price is $45,000, exercising the option allows the trader to buy Bitcoin at the lower strike price, realizing a profit. Alternatively, they might sell the option at its current market value.
Did you know? The “Max Pain” theory is commonly referenced in Bitcoin options trading. It suggests that the price of Bitcoin will gravitate towards the strike price that results in the maximum financial loss for option holders at expiry.
How to check the date of the next Bitcoin options expiry event?
To check for upcoming Bitcoin options expiry dates, use resources like CoinGlass and CME Group.
There are a range of online resources designed to provide traders with detailed data on open interest and expiry dates, crucial for anticipating market volatility and price movements.
CME Group, in particular, offers a helpful calendar functionality that lists the expiration dates for options on Bitcoin futures by contract month, product code and settlement date.
CoinGlass, on the other hand, offers detailed charts and metrics on options open interest by expiry.
For traders, tracking these expiry events using multiple sources and tools is crucial because they can significantly impact market volatility and price movements.
Risks of Bitcoin options trading near expiry
Traders must carefully consider the risks below:
- Increased volatility: As explored, there are rapid and unpredictable price swings near the time of expiry, increasing the risk of significant losses if the market moves against your position.
- Liquidity issues: The closer options get to expiry, the more likely liquidity may decrease, especially for out-of-the-money options. This can make it difficult to enter or exit positions at favorable prices, potentially trapping traders in unfavorable trades.
- Time decay: Options are time-sensitive instruments. As expiry approaches, the time value of an option (known as theta) rapidly diminishes. This means that even if the underlying Bitcoin price moves in the direction a trader anticipates, the option might still lose value, particularly for out-of-the-money options.
- Unexpected market movements: The cryptocurrency market is known for its unpredictability. Sudden news events or market developments can lead to drastic price movements, especially near the expiry of large options contracts, catching traders off guard.
- Psychological pressure: The pressure to make quick decisions as expiry approaches can lead to impulsive trading behavior. Traders may be tempted to close or adjust positions hastily, potentially leading to suboptimal decisions and increased losses.
To ensure risks are mitigated, it’s important to follow some best practices. By staying informed and avoiding emotional decision-making, traders can better navigate the challenges that come with Bitcoin options expiry.
Written by Bradley Peak