Bitcoin, Ether could witness upside volatility as $15b options expiry looms

The impending quarterly expiry of Bitcoin (BTC) and Ether {{ETH} options contracts worth several billion dollars could breed bullish price volatility, according to observers.

On Friday at 08:00 UTC, Deribit, the world’s leading cryptocurrency options exchange, will settle quarterly contracts worth $15.2 billion. Bitcoin options account for $9.5 billion or 62% of the total notional open interest due for settlement, while ether options comprise the rest.

The $15 billion expiry is one of the largest in the exchange’s history, Deribit data show. The expiry will wipe out 40% and 43% of Bitcoin and Ether’s total notional open interest across maturities.

Notional open interest refers to the dollar value of the number of active contracts at a given time. On Deribit, one options contract represents one BTC and one ETH. The exchange accounts for over 85% of the global crypto options market. A call option is a type of financial contract that gives the buyer the right, but not the obligation, to purchase an underlying asset at a preset price at a later date. A put gives the right to sell.

Luuk Strijers, chief commercial officer at Deribit, said large amounts of options are set to expire in-the-money (ITM), which could inject upward pressure or volatility into the market.

A call option expiring ITM has a strike price lower than the underlying asset’s going market rate. On expiry, the ITM call gives the purchaser the right to buy 1 BTC at the strike price (which is lower than the spot market rate), generating a profit. A put option expiring ITM has a strike price higher than the underlying asset’s going market rate.

At the going market rate of around $70,000, bitcoin options worth $3.9 billion are set to expire in the money. That’s 41% of the total quarterly open interest of $9.5 billion due for settlement. Similarly, 15% of ETH’s total quarterly open interest of $5.7 billion is on track to expire in the money, as data from Deribit shows.

“These levels are higher than usual, which can also be seen in the low max pain levels. The reason is, of course, the recent price rally. Higher levels of ITM expiries might lead to potential upward pressure or volatility in the underlying,” Strijers told CoinDesk.

Bitcoin options: open interest by strike price (March 29 expiry). (Deribit) (Deribit)

The maximum pain points for BTC and ETH's quarterly expiry are $50,000 and $2,600, respectively. The max pain is when option buyers stand to lose the most money. The theory is that option sellers (writers), usually institutions or traders with ample capital supply, look to pin prices near the maximum pain point to inflict maximum loss on option buyers.

During the last bull market, bitcoin and ether consistently corrected lower in the direction of their respective max pain points only to resume the rally after the expiry.

Similar dynamics could be at play, according to Strijers.

“The market could see upward pressure as the expiry removes the lower max pain magnet,” Strijers explained.

ETH options: open interest by strike price. (March 29 expiry). (Deribit) (Deribit)

Dealer hedging

David Brickell, head of international distribution at Toronto-based crypto platform FRNT Financial, said hedging activities of dealers or market makers could boost volatility.

“The big impact, however, is [from] the gamma positioning of dealers into the event. Dealers are short some $50 million of gamma, with the majority focused at around the $70,000 strike. As we near the expiry, that gamma position gets larger and the forced hedging will exacerbate volatility around $70,000, providing for some whippy, choppy moves either side of the said level,” Brickell told CoinDesk.

Gamma measures the movement of Delta, which gauges the option’s sensitivity to changes in the underlying asset’s price. In other words, gamma shows the amount of delta-hedging market makers need to do to keep their net exposure neutral as prices move. Market makers must maintain a market-neutral exposure while creating liquidity in order books and profiting from the bid-ask spread.

When market makers are short gamma or holding short options positions, they buy high and sell low to hedge their books, potentially amplifying the price.