The biggest Bitcoin options due date of all time expires on March 26th. More than $ 6 billion in Bitcoin (BTC) options will expire on all exchanges on Friday, with most of those options being in Deribit. This will be a record 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 nearly $ 4 billion in options expired, which represented 36% of open interest at the time.
The huge maturity that is coming is due to the rapid growth of open contracts in the Bitcoin options market. Bitcoin’s OI has grown by more than 147% since the beginning of the year. The total OI on the top five crypto derivatives exchanges is currently $ 14.01 billion, compared to $ 5.67 billion on January 1.
Influence of the options market in the spot market grows
The size of the options market is increasing both in volume and in open interest. As a result, the influence that this market has on the spot markets is also increasing. It is known that the derivatives market is an important tool for discovering prices in the spot market. For example, in traditional financial markets, the size of the derivatives market is several times the size of the spot markets for assets such as gold, stocks, etc.
However, the opposite is the case with Bitcoin: the size of the BTC spot market is several times larger than the derivatives market. Even so, investors look to the futures markets to find prices at various stages and look to the options market to assess the prevailing sentiment. In this regard, Sam Bankman-Fried, CEO of FTX – a cryptocurrency derivatives exchange – told Cointelegraph:
“BTC derivatives have been the main drivers of the spot markets for years. At least since 2018, derivatives move more in sight than spot derivatives ”.
This change began in 2018, as option volumes began to rise, bringing in more investors who wanted to hedge their bets on the futures and spot markets. Cointelegraph further discussed the influence of the options markets with Shaun Fernando, head of risk and product strategy on the Deribit cryptocurrency derivatives exchange. He said:
“The impact of options at the site is growing as OI and volumes are increasing. How much influence is yet to be seen, but there may be momentary price shocks with whale options trading. Options can also be seen as one of several important indicators for the spot market ”.
Expiration will not lead to all options being traded at once, as some of the strike prices seem highly unrealistic. The options market is usually an all-or-nothing game; at maturity, they have a value or are considered to be totally worthless. They become useless when the underlying asset is traded above the exercise price of the call option or below the exercise price of the put option.
To elaborate, “call” options are contracts that allow the option holder the right, but not the obligation, to buy the underlying asset at a predetermined price within a specific period of time. In contrast, 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 strike price.
Markets can become optimistic after expiration
Last week, Bitcoin registered bearish price movements. It went from trading in the range of $ 60,000 on March 19 to the range of $ 50,000 on March 25. This drop has prompted investors to question the real value of Bitcoin and to wonder if the bull market will end soon.
But this $ 6 billion maturity could lead to a change in this sentiment. Bankman-Fried further explained that more option launchers feel comfortable selling the negative side than launching the positive side, saying:
“The crypto industry is optimistic about cryptography (shock!). You can see this in a variety of ways – from positive futures premiums to perpetual financing rates to US dollar loan rates; this is another sign of this. “
To assess the impact of maturity, it is beneficial to exclude neutral put options to pessimists who would be active below $ 47,000 and call options with an exercise price above $ 66,000, as both appear to be highly unlikely scenarios. This leaves an imbalance of $ 668 million in favor of optimistic call options, which may dominate the post-maturity sentiment.
When analyzing the historical action of the Bitcoin price when the options expire, Twitter user James Viggiano shared an interesting observation that the price generally appears to rise after maturity. The same is true for all monthly expiration events from October 2020 to February.
Even though an option maturity of more than $ 6 billion seems huge for Bitcoin markets, it is important to note that almost 43% of these options are already useless due to the current price range of BTC. So, in reality, the options will expire much less than what is set to expire.
Robbie Liu, market analyst at OKEx Insights – the research team at the OKEx cryptocurrency exchange – told Cointelegraph: “The maturities of the main options are often accompanied by an increase in spot volatility and the same goes for futures.”
The maximum price for the maturity of these options is currently $ 44,000. The maximum pain price is the strike price at which there are more put and call options. Thus, this is the price at which the maximum number of market participants will face financial losses. The maximum pain theory implies that the price of an option will gravitate towards the price of maximum pain as the maturity approaches. Fernando also explained what the maximum pain price means for this specific expiration event:
“Max Pain at 44k creates a small downward pressure force on the spot. After that pressure expires, there is a greater possibility of an upward movement. Some say that it is not by chance that we had great movements at the time of expiration of the big options. “
Another important aspect to note is that the one-month realized volatility is currently at the lowest level in 2021, and the levels of implied volatility are at the lowest since December 2020. The lowest implied volatility suggests that there are lower premiums, making the options cheaper for investors. exchange.
The greater the total OI options for a given asset, the greater the impact it will have on the price of the underlying asset. The $ 44,000 maximum pain price puts a bearish sentiment on the market – this is a concern for optimists in the long run. Liu gave an opinion on what the markets can expect after the expiration of this options history:
“After each big expiration, the market is, in the short term, free to move again and, given that we are in a broader bull market, price appreciation is the most likely result at the moment. However, the larger the crypto market becomes, the more correlations it creates with various market segments, making it less predictable. “
Bitcoin continued to see more institutional adoption after Tesla started accepting Bitcoin from U.S. customers as payment for its products. This led to another “Elon candle” on the market, raising the price by $ 3,000 – but it declined the next day. Tesla even publicly despised Bitcoin’s hard fork Bitcoin Cash (BCH), which led the token to reach new lows in the market.
However, expiring options may remove the downward pressure that currently exists in the market and make markets optimistic again, as the options market is indicative that markets are still leaning towards bulls.