What Does Nearly $14 Billion in Options Expiration Mean for Bitcoin?

Just when you thought the end of the year couldn’t get any more interesting, an important options expiration is set to shake things up in this highly leveraged market.

Options are derivative contracts that give the buyer the right to buy or sell the underlying asset at a predetermined price at a future date. A call gives the right to buy, and a put gives the right to sell.

On Friday at 8:00 UTC, 146,000 Bitcoin options contracts, worth approximately US$14 billion and each with a volume of 1 Bitcoin, will expire on the cryptocurrency exchange. Dearbit. The notional amount represents 44% of the total open interest of all BTC options across different maturities, representing the largest expiration event ever on Deribit.

ETH options worth $3.84 billion will also expire. ETH is down nearly 12% to $3,400 since the Fed meeting. Deribit represents more than 80% of the global crypto options market.

Large OI for ITM expiration

As of writing, it appears that Friday’s settlement will see $4 billion worth of Bitcoin options, representing 28% of the total open interest of $14 billion, expire “in-the-money (ITM),” resulting in a profit for buyers. These positions may be squared off or rolled over (rolled over) to the next expiration date, which may cause market volatility.

“I suspect a fair amount of open interest in BTC and ETH will be held to January 31 and March 28 as the earliest liquidity anchors into the new year,” said Simranjit Singh, portfolio manager and trader at GSR. .

It is also worth noting that the open interest ratio for calls for Friday expiration is 0.69, which means that there are seven open interest options open for every 10 calls outstanding. Relatively higher open interest in calls, which provides an asymmetric upside to the buyer, indicates that leverage is skewed to the upside.

However, the problem is that Bitcoin’s bullish momentum has lost steam since the Fed’s decision last Wednesday, with Chairman Jerome Powell ruling out potential Fed purchases of the cryptocurrency while indicating smaller interest rate cuts for 2025.

Bitcoin has since fallen more than 10% to $95,000. According to CoinDesk indicators Data.

This means that traders with leveraged bullish bets are at risk of significant losses. If they decide to give up and exit their positions, it could lead to more volatility.

“The previously prevailing upward momentum has stalled, leaving the market highly supported to the upside. This situation increases the risk of a rapid snowball effect in the event of a significant downward move,” Deribit CEO Luke Strygers told CoinDesk.

“All eyes are on this completion, because it has the potential to shape the narrative as the new year approaches,” Striggers added.

Directional uncertainty remains

Key options-based metrics show that there is a noticeable lack of clarity in the market regarding potential price movements as the log expiration approaches.

“The long-awaited annual expiration is poised to cap off a great year for the bulls. However, trend uncertainty remains, highlighted by increased volatility in volatility,” Strygers said.

Volatility Volatility (vol-of-vol) is a measure of fluctuations in the volatility of an asset. In other words, it measures the volatility or degree of price turbulence in the asset itself. If an asset’s volatility changes significantly over time, it means its trading volume is high.

High trading volume usually means increased sensitivity to news and economic data, resulting in rapid changes in asset prices, necessitating aggressive position adjustment and hedging.

The market is more bearish on ETH

How expiration options are currently priced reveals a more bearish outlook for ETH compared to BTC.

Compare Smiles Vol [Friday’s] “After the expiration between today and yesterday, we see that the BTC smile was almost unaffected, while the volume of ETH implied calls decreased significantly,” said Andrew Melville, research analyst at Block Scholes.

Volatility smiley 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 reduced demand for bullish bets, indicating a weak outlook for the Ethereum native token.

This is also evident from options skew, which measures how much investors are willing to pay for calls that offer asymmetric upside potential versus puts.

“After more than a week of weak spot performance, ETH put option skew has become more strongly bearish (2.06% in favor of puts compared to a more neutral 1.64% towards BTC calls),” Melville noted.

“Overall, year-end positioning reflects a somewhat less bullish picture than we saw in December, but more clearly for ETH than for BTC,” Melville added.