Just when you thought the end of the year couldn’t get any more intriguing, the expiration of major features is about to shake up this highly leveraged market.
Options are derivative contracts that give the client the right to buy or sell the underlying asset at a predefined value at a later date. A call option provides the right to buy and a put option provides the right to sell.
On Friday at 8:00 UTC, 146,000 bitcoin options contracts, valued at nearly $14 billion and sized at one BTC each, will expire on the crypto exchange Deribit. The notional amount represents 44% of the total open interest for all BTC options across different maturities, marking the largest expiry event ever on Deribit.
ETH options worth $3.84 billion will expire as well. ETH has dropped nearly 12% to $3,400 since the Fed meeting. Deribit accounts for over 80% of the global crypto options market.
As of writing, Friday’s settlement looked set to see $4 billion worth of BTC options, representing 28% of the total open interest of $14 billion, expire “in the money (ITM),” generating a profit for buyers. These positions may be squared off or rolled over (shifted) to the next expiry, potentially causing market volatility.
“I suspect some open interest in BTC and ETH will last into January. March 31 and March 28 are the closest liquidity anchors to the start of the new year,” said Simranjeet Singh, portfolio manager and trader at GSR.
It’s also worth noting that the put open interest ratio for Friday’s expiration is 0. 69, meaning there are seven puts open for each of the 10 outstanding calls. Relatively higher open interest in call options, giving the buyer an asymmetric bullish outlook, indicates that leverage is biased to the upside.
The problem, however, is that BTC’s bullish momentum has lost steam since last Wednesday’s Federal Reserve decision, when Chairman Jerome Powell ruled out conceivable purchases of the cryptocurrency through the Fed, while signaling less rate cuts by 2025.
BTC has since dropped over 10% to $95,000, according to CoinDesk indices data.
This means that traders with leveraged bullish bets are at risk of magnified losses. If they decide to throw in the towel and exit their positions, it could lead to more volatility.
“The dominant bullish momentum in the past has stalled, leaving the market heavily leveraged higher. This positioning increases the threat of an immediate snowball effect if a significant bearish move occurs,” said Luuk Strijers, CEO of DeribitArray at CoinDesk.
“All eyes are on this exhale, as it has the perspective of the narrative as we head into the new year,” Strijers added.
Key options-based metrics show there’s a noticeable lack of clarity in the market regarding potential price movements as the record expiry nears.
“The long-awaited annual expiry is about to conclude a year for bulls. However, directional uncertainty persists, highlighted by increased volatility in vol-of-flight,” Strijers said.
The volatility of volatility (vol-of-vol) is a measure of fluctuations in the volatility of an asset. In other words, it measures how much the volatility or the degree of price turbulence in the asset itself fluctuates. If an asset’s volatility changes significantly over time, it has a high vol-of-vol.
A high vol-of-vol typically means increased sensitivity to news and economic data, leading to rapid changes in asset prices, necessitating aggressive position adjustment and hedging.
The way expiring features are valued lately is a more bearish outlook for ETH relative to BTC.
“Comparing [Friday’s] expiration smile volume between yesterday and yesterday, we see that BTC smile is almost unchanged, while ETH implied call volume has decreased significantly,” said Andrew Melville, research analyst. by Block Scholes.
A volatility smile is a graphical representation of the implied volatility of functions with the same expiration date but other strike prices. The decrease in ETH’s implied volatility requires a reduction in demand for bullish bets, indicating a dovish outlook for Ethereum’s local token.
This is also evident in feature bias, which measures the amount investors are willing to pay for buy features that offer asymmetric bullish prospects relative to put options.
“After more than a week of worse spot performance, the ETH Buy and Sell Bias Index is more strongly bearish (2. 06% in favor vs. 1. 64% more bias for BTC calls),” Melville pointed out.
Overall, end-of-year positioning reflects a moderately less bullish picture than we saw going into December, but even more starkly for ETH than BTC,” Melville added.
Omkar Godbole is a Co-Editor in CoinDesk’s Markets team based in Mumbai, has a Master’s degree in Finance and is a Chartered Market Technician (CMT). Omkar previously worked at FXStreet, writing research on foreign exchange markets and as a core analyst in the FX and Commodities office of Mumbai-based brokerage houses. Omkar owns small amounts of bitcoin, ether, BitTorrent, tron and dot.
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