Crypto Options Expiry Worth $4.8 Billion Looms on Deribit: What to Expect

A significant event in the world of cryptocurrency trading is set to occur this Friday at 08:00 UTC when a total of 1.217 million bitcoin (BTC) and ether (ETH) options contracts, with a staggering notional value of $4.8 billion, expire on the renowned crypto options exchange, Deribit.

Out of the total, approximately 10%, equivalent to 117,000 contracts, are tied to bitcoin, while the remaining are ether options. It’s important to note that on Deribit, each options contract represents one BTC and one ETH. These options are derivatives that grant the purchaser the right to buy or sell the underlying asset at a predetermined price on a future date.

The outcome of these derivative contracts will hinge on the performance of the top two cryptocurrencies by the week’s end. As such, both seasoned traders and retail investors are closely monitoring these monthly and quarterly options expiries, given their potential to impact markets leading up to and following the settlement.

Among these, quarterly expiries typically carry the most significant influence in terms of trading volume and value. For instance, last June, expiries amounted to a staggering $5.4 billion, and March witnessed $5.2 billion in total expirations. The current quarter follows a similar pattern in 2023, with $3 billion in BTC options and $1.8 billion in ETH options set to expire in September, and the Max Pain level closely aligning with current price levels.

The Max Pain level, a concept in options trading, is where options buyers are expected to incur the greatest losses upon expiration. The theory posits that options writers or sellers aim to keep prices close to the Max Pain point as they approach expiration, causing the most significant discomfort for buyers. This is achieved by purchasing and selling the underlying asset in the spot and futures markets.

Another crucial aspect of quarterly settlements is the role of market makers, entities tasked with ensuring liquidity in an order book. Market makers actively buy and sell the underlying asset to hedge their gamma exposure and maintain a market-neutral portfolio as the expiry date approaches. Gamma, in options terminology, refers to the rate of change of delta or the sensitivity of an option’s price to fluctuations in the underlying asset’s price.

When market makers hold a net positive gamma exposure, they work to dampen price volatility by buying low and selling high in the spot market. Conversely, if their net gamma exposure is negative, they buy high and sell low, amplifying price movements. In the past month, market stability persisted, while the Gamma for September expiries gradually increased as a function of time. However, the uneven distribution of Gamma among traders is unlikely to lead to significant market fluctuations in the coming week.

As this crucial options expiry date approaches, crypto markets are in for a period of heightened attention and potential price action. Traders and investors will be closely monitoring the outcomes of these derivative contracts to gauge the direction of the cryptocurrency market in the short term.

Digital Assets Desk