The largest Bitcoin options expire on March 26. Over $ 6 billion of Bitcoin (BTC) options expire on the stock exchange on Friday, with most of these options on Deribit. This will be the default expiration in terms of value and number of options – a total of 100,400 bitcoin options will expire. The previous record was set in January when almost $ 4 billion in options expired, which was 36% of open interest at the time.
The coming massive expiration is due to the rapid growth of open interest in the Bitcoin options market. Bitcoin’s OI is up over 147% since the beginning of the year. The total OI on the five largest cryptocurrency exchanges is currently $ 14.01 billion, up from $ 5.67 billion as of January 1.
The influence from the options market on the spot market is growing.
The options market is growing in size and open interest is increasing. As a result, the influence of this market on the spot markets increases. The derivatives market is known to be an important tool for determining prices in the spot market. For example, in traditional financial markets, the size of the derivatives market is many times the size of the spot markets for assets such as gold, equities, etc.
However, the opposite is true for Bitcoin: the size of the BTC spot market is several times larger than the derivatives market. However, investors look at the futures markets for prices at different stages and look at the options market to measure the prevailing mood. In this regard, Sam Bankman Freed, CEO of FTX, told a cryptocurrency derivative exchange to Cointelegraph:
Bitcoin derivatives have been the main engine in the spot markets for many years. Since at least 2018, derivatives have moved more instantaneously than spot derivatives. ”
This change began in 2018 when option volumes began to rise, and attracted more investors who wanted to secure their games in the futures and spot markets. Cointelegraph also discussed the effects of options markets with Sean Fernando, head of risk and product strategy at the Deribit derivatives exchange. He said:
“The effect of spot options increases with increasing OI and volumes. The extent of the impact remains to be seen, but temporary price shocks are possible when trading in whale options. Options can also be considered as one of several leading indicators in the spot market. ”
After the expiry, not all options will be exercised at the same time, as some strike prices appear to be largely unrealistic. The options market is usually an all-or-nothing game; After the expiration date, it either has value or is considered completely useless. They become useless when the underlying trades above or below the redemption price.
To clarify, call options are contracts that give the option holder the right, but not the obligation, to buy the underlying asset at a predetermined price for a specified period of time. On the other hand, 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. This predetermined price is called the withdrawal price.
Markets may become bullish after expiration
Bitcoin has experienced bearish price movements over the past week. It went from trading in the $ 60,000 range on March 19 to a $ 50,000 range on March 25. This fall has left investors in doubt about the true value of bitcoin and whether the beef market will close anytime soon.
But the expiration of $ 6 billion could change that perception. Bankman-Fried further explained that several alternative writers feel more comfortable selling the downside instead of writing up, saying:
“The cryptocurrency industry is optimistic about cryptocurrencies (shock!). You can see this in many ways – from positive future premiums to constant financing rates and borrowing rates in USD; this is another sign of this. ”
To assess the impact of the expiration, it is useful to exclude neutral or bearish putters that will be active below $ 47,000 and call options with redemption prices above $ 66,000, as both scenarios seem very unlikely. This results in an imbalance of $ 668 million in favor of bullish calls, which may dominate sentiment after the expiration.
Analyzing the historical behavior of the bitcoin price at the expiration of the options, Twitter user James Viggiano shared an interesting observation that the price tends to rise after the expiration. The same applies to all events with a monthly expiration date from October 2020 to February.