The biggest-ever Bitcoin options expiry is due on March 26. Over $6 billion worth of Bitcoin (BTC) options will expire across exchanges on Friday, with a majority of these options being on Deribit. This will be a record expiry in terms of the 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 worth of options expired, representing 36% of the open interest at the time.
The enormous upcoming expiry comes on the back of rapid growth in open interest in the Bitcoin options market. The OI of Bitcoin has seen more than 147% growth since the beginning of the year. The total OI across the top five crypto derivatives exchanges is currently $14.01 billion, up from $5.67 billion on Jan. 1.
Influence of options market on spot market grows
The size of the options market is increasing both in volume and open interest. As a result, the influence that this market has on the spot markets is also increasing. It’s well known that the derivatives market is an important tool for the spot market’s price discovery. For example, in the traditional financial markets, the size of the derivatives market is several times the size of the spot markets for assets like gold, equities, 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 at various stages and look to the options market to gauge the sentiment that prevails. Regarding this, Sam Bankman-Fried, CEO of FTX — a cryptocurrency derivatives exchange — told Cointelegraph:
“BTC derivatives have been the primary drivers of spot markets for years. At least since 2018, derivatives move spot more than spot moves derivatives.”
This change started in 2018 once options volumes started growing, bringing in more investors who wanted to hedge their bets in the futures and spot markets. Cointelegraph further discussed the influence of the options markets with Shaun Fernando, head of risk and product strategy at cryptocurrency derivatives exchange Deribit. He said:
“The impact of options on spot is growing as the OI and volumes are increasing. Just how much of an influence remains to be seen but there can be momentary price shocks with whale options trades. Options can also be seen as one of several leading indicators for the spot market.”
The expiry will not lead to all options trading at once, as some of the strike prices seem highly unrealistic. The options market is usually an all-or-nothing game; on expiry, they either have a value or are deemed entirely worthless. They become worthless when the underlying asset trades above the call 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 specific time period. In contrast, 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 specific time. That predetermined price is called the strike price.
Markets could become bullish post-expiry
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 real value of Bitcoin and wonder if the bull market is coming to an end soon.
But this $6 billion expiry could lead to a change in this sentiment. Bankman-Fried further explained that more options writers are comfortable selling the downside than writing the upside, saying:
“The crypto industry is bullish on crypto (shocker!). You can see this in lots of ways — from positive futures premiums to perpetual funding rates to USD borrow rates; this is another sign of that.”
To gauge the impact of the expiry, it’s beneficial to exclude the neutral-to-bearish put options that would be active below $47,000 and the call options with a strike price above $66,000, as both seem to be highly improbable scenarios. This leaves a $668 million imbalance in favor of bullish call options, which could dominate the sentiment post-expiry.
While analyzing the historical price action of Bitcoin when options expire, Twitter user James Viggiano shared an interesting observation that the price generally seems to rise after an expiry. The same is observed for every monthly expiry event from October 2020 through February.
Even though an options expiry of over $6 billion seems enormous for the Bitcoin markets, it is important to note that nearly 43% of these options are already worthless due to BTC’s current price range. Thus, in reality, the options expiry will be worth way less than what is set to expire.
Robbie Liu, market analyst at OKEx Insights — the research team at cryptocurrency exchange OKEx — told Cointelegraph: “Major options expiries are often accompanied by an increase in spot volatility and the same goes for futures.”
The max pain price for this options expiry currently stands at $44,000. The max pain price is the strike price at which there are the most puts and calls. Thus, this is the price where the maximum number of market participants will face financial losses. The max pain theory implies that an options' price will gravitate toward the max pain price as expiry nears. Fernando further explained what the max pain price means for this specific expiry event:
“The Max Pain at 44k creates a small downward pressure force on the spot. Once this pressure expires, then there is a greater possibility of an upward move. Some say that it is no coincidence that we have had big moves around the times of the big option expiries.”
Another important aspect to note is that the one-month realized volatility is currently at the lowest level of 2021, and implied volatility levels are at the lowest since December 2020. Lower implied volatility suggests there are lower premiums, thus making options cheaper for investors to trade-in.
The larger the total options OI for a certain asset, the bigger the impact it will have on the price of the underlying asset. The max pain price being at a low $44,000 puts some bearish sentiment in the market — this is a concern for bulls in the long term. Liu opined further regarding what the markets can expect after this historic options expiry:
“After every large expiry, the market is, in the short-term, free to move again, and given that we are in a broader bull market, price appreciation is the more likely outcome at the moment. However, the bigger the crypto market becomes, the more correlations it builds with various market segments, making it less predictable.”
Bitcoin continued to see more institutional adoption after Tesla began accepting Bitcoin from U.S. customers as payment for its products. This led to another “Elon candle” in the market, pushing up the price by $3,000 — but it subsided the very next day. Tesla even publicly snubbed Bitcoin’s hard fork Bitcoin Cash (BCH), which led to the token reaching new lows in the market.
However, this options expiry could remove the downward pressure that currently exists in the market and turn the markets bullish again, as the options market is indicative of the markets still being skewed toward the bulls.