Just when you thought the end of the year couldn't get any more interesting, a significant option expiration is about to shake up the landscape of this highly leveraged market.
An option is a derivative contract that gives the buyer the right to buy or sell the underlying asset at a preset price at a later date. A call gives you the right to buy and a put gives you the right to sell.
At 8:00 UTC on Friday, 146,000 Bitcoin option contracts worth nearly $14 billion, or 1 BTC, will expire on the cryptocurrency exchange Deribit. This notional amount represented 44% of the total open interest of all BTC options across various maturities, making it the largest expiry event in Deribit history.
ETH options worth $3.84 billion will expire as well. ETH has fallen nearly 12% to $3,400 since the Fed meeting. Deribit controls over 80% of the global crypto options market.
Critical OIs that expire ITM
At the time of writing, Friday's settlement is expected to result in $4 billion worth of BTC options, or 28% of the $14 billion total open interest, expiring “in the money” (ITM), generating profits for buyers. It has become. These positions can be squared or rolled over (shifted) to the next expiry, which can cause market volatility.
Simranjeet Singh, portfolio manager and trader at GSR, said: “Early in the new year, we expect significant open interest in BTC and ETH to be rolled into the January 31st and March 28th expirations as the closest liquidity anchors. I think so.'' .
Also note that the put-call open interest ratio for Friday expiration is 0.69. This means that for every 10 outstanding calls, there are 7 put options open. Relatively high open interest on calls, resulting in asymmetric upside for buyers, indicates that leverage is biased towards the upside.
The problem, however, is that BTC's bullish momentum has stalled since the Fed's decision last Wednesday, when Chairman Jerome Powell ruled out any Fed purchases of cryptocurrencies while hinting at a smaller rate cut in 2025. .
BTC has since fallen more than 10% to $95,000, according to index data from CoinDesk.
This means that traders making bullish leveraged bets risk magnifying their losses. If they decide to throw in the towel and exit their positions, it could lead to even more volatility.
“The previously dominant bullish momentum has stalled and the market is highly leveraged to the upside. This positioning risks a rapid snowball effect in the event of a significant downside move. Deribit CEO Luke Strierels told CoinDesk.
“All eyes are on this lapse because it has the potential to shape the narrative going into the new year,” Strijers added.
Directional uncertainty remains
Key options-based indicators are showing a significant lack of clarity in the market regarding potential price movements as record expiration approaches.
“The long-awaited annual expiration has arrived, capping off a remarkable year for bulls. However, directional uncertainty remains, as highlighted by increased volatility. Gender is still there,” Streiners said.
VolatilityVolatility (vol-of-vol) is a measure of the volatility change of an asset. In other words, it measures how much the asset itself fluctuates in terms of volatility or price fluctuations. If an asset's volatility changes significantly over time, the asset's volume will be high.
Higher volume typically means greater sensitivity to news and economic data, leading to rapid changes in asset prices and requiring active position adjustments and hedging.
ETH market becomes more bearish
Looking at how expiring options are currently priced, we can see that the outlook for ETH is more bearish compared to BTC.
“Comparing the volume smiles for today's and yesterday's (Friday) expirations, BTC's smiles are almost unchanged, while ETH's implied call volume is We can see that there has been a significant decrease.”
Volatility Smile is a graphical representation of the implied volatility of options with the same expiration date but different strike prices. A decline in the implied volatility of ETH calls means less demand for bullish bets, indicating a weaker outlook for Ethereum's native token.
This is evidenced by option skew, which measures how much investors are willing to pay for a call that provides asymmetric upside room for a put.
“After more than a week of worsening spot performance, the ETH put-call skew ratio has become more bearish (2.06% favoring puts compared to a more neutral 1.64% against BTC calls).” Melville pointed out.
Overall, the year-end positioning reflects a slightly less bullish situation as seen in December, but reflects a more challenging situation for ETH than for BTC,” Melville said. added.
