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The impending quarterly expiration of billions of dollars worth of Bitcoin (BTC) and Ether {{ETH} options contracts could trigger bullish price movements, according to observers.
At 08:00 UTC on Friday, Deribit, the world’s leading crypto options exchange, will settle quarterly contracts worth $15.2 billion. Bitcoin options account for $9.5 billion, or 62% of the total notional open interest scheduled for settlement, with Ether options accounting for the rest.
The $15 billion expiration is one of the largest in the exchange’s history, according to Deribit data. The expirations will wipe out 40% and 43% of the total notional open interest for Bitcoin and Ether over their respective maturities.
Notional open interest refers to the dollar value of the number of active contracts at a particular point in time. On Deribit, one options contract represents one BTC and one ETH. This exchange accounts for more than 85% of the global crypto options market. A call option is a type of financial contract that gives the buyer the right to buy the underlying asset at a preset price at a later date. A put gives you the right to sell.
Luke Strierels, chief commercial officer at Deribit, said a large number of options are expiring in-the-money (ITM), which could create upward pressure and volatility in the market.
The expiring ITM strike price of a call option is lower than the market rate of the underlying asset. Upon expiration, the ITM call gives the buyer the right to buy 1 BTC at the strike price (lower than the spot market rate), generating a profit. The strike price of an expiring ITM on a put option is higher than the market rate of the underlying asset.
At the current market rate of about $70,000, $3.9 billion worth of Bitcoin options are scheduled to expire in the money. This represents 41% of the total open interest of $9.5 billion in the expiring quarter. Similarly, 15% of ETH’s total quarterly open interest of $5.7 billion is scheduled to expire in-the-money, Deribit data shows.
“These levels are higher than normal, as evidenced by the low maximum pain levels. The reason, of course, is the recent price rally. Higher levels of ITM maturities also reflect potential upward pressure on the underlying assets and That could lead to volatility,” Stries told CoinDesk.
The biggest problem with the quarterly expiry dates for BTC and ETH are $50,000 and $2,600, respectively. The greatest pain is when the option buyer stands to lose the most money. The theory is that the option seller (writer), usually a well-funded institutional investor or trader, attempts to fix the price near the maximum pain point in order to inflict maximum losses on the option buyer. Thing.
During the last bull market, Bitcoin and Ether rose consistently fixed low Resume the rally only after the deadline has expired, in the direction of their respective greatest pain points.
Streers says a similar dynamic may be at play.
“Expiration could put upward pressure on the market as the maximum pain magnet is removed,” Strigers explained.
David Brickell, head of international distribution at Toronto-based cryptocurrency platform FRNT Financial, said hedging activity by dealers and market makers could increase volatility.
“But the big impact is that [from] Gamma positioning of dealers to events. Dealers are short on Gamma by about $50 million, with most striking around $70,000. “As expiration approaches, that gamma position will get bigger and the forced hedging will exacerbate the volatility around $70,000, causing choppy moves on either side of that level,” Brickell told CoinDesk.
Gamma measures the movement of delta and measures the sensitivity of an option to changes in the price of the underlying asset. In other words, gamma indicates the amount of delta hedging a market maker needs to do to keep the net exposure neutral in response to price changes. Market makers need to maintain market-neutral exposure while creating liquidity in the order book and profiting from the bid-ask spread.
If a market maker is short Gamma or holds a short option position, they could buy high and sell low to hedge their books, potentially amplifying the price.
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