Bitcoin derivatives saw a major expiration event with a face value of over $ 1 billion. Today, $ 272 million in Bitcoin futures contracts expired on the Chicago Mercantile Exchange, while more than 65,000 Bitcoin options contracts on Deribit, CME and OKEx with a face value of over $ 740 million have expired.
Typically, large decay events lead to a large change in volatility and price, which is reflected in derivative volumes, open positions and even buy / sell relationships. The Bitcoin Derivatives (BTC) market, which consists mainly of Bitcoin futures contracts and options, grew many times over in 2020. This growth has deepened the relationship between the price of BTC and the derivatives market.
Impact on the price and maximum pain
Prior to expiration, it was said that around 60% of the options selected for expiration were “out of money”, meaning that 60% of those options had an exercise price that was higher than the market price of Bitcoin. This reduces the likelihood of significant volatility in the underlying asset, as there is no point in exercising these options at prices above market prices.
If these options are mostly “in the money”, their exercise price must be lower than the market price, which makes them profitable for investors and thus increases volatility.
Another clue to the impact of the expected volatility of a major expiry event in the derivatives market is the concept of maximum pain theory, a calculation method that shows the price level at which option buyers suffer the most financial losses. It is a great measure of the impact of price as it reflects any benefits open to a certain expiration date rather than an investor’s portfolio. Luuk Strijers, Deribit’s Chief Commercial Officer, discussed the process with Cointelegraph and said:
“Given the maximum pain, this suggests that no significant impact is expected when Bitcoin expires in the $ 9,000 to $ 12,000 range. Some believe that the monthly calls in August that flowed into The Big Bullish Move’s “money” last month could cause temporary price distortions in futures contracts as their counterparts hedge their delta differently over the settlement period.
As expected, after the derivatives expired, Bitcoin was in this range, rising from $ 11,367 on expiration to around $ 11,500, which is a critical level of resistance. This indicates that the market uptrend is still intact with investors after the expiration date. At Deribit, average option sizes were observed with 17,000 options traded on the past day
Futures and options with open interest show opposite trends
Open interest is the number of futures / options outstanding on the market on each trading day. It is often an indicator of market sentiment and the importance of the price development being observed. According to data from Skew that preceded this major expiration, the open interest in options is trending positively while that for futures is trending negatively. This trend can be observed at the OI of the Chicago Mercantile Exchange.
Open interest in Bitcoin options hit an all-time high of $ 2.1 billion on July 31. Thereafter, the OI fell in August before hitting another $ 2 billion on August 20, and has held that level until the expiration date. While higher open interest is usually seen as a sign that the markets could either be tilted up or down, Jay Howe, CEO of OKEx cryptocurrency exchange, told Cointelegraph:
“The bear market for Bitcoin will not reduce the amount of OI. On the contrary, the stronger the downward trend or upward sentiment, the stronger the demand for trader transactions, which could lead to an increase in the OI.”
One factor that has fueled the open interest in BTC options could be the fact that Deribit, the leader in digital derivatives, cut expiration fees for a major expiration event. Strijers confirmed the assessment with the words: “Deribit reduced the expiry fees by 25%, which will be clear to all OI holders on Friday.”