The upcoming options expiry is set to stir up a market already highly leveraged to the upside, according to Deribit. As the year draws to a close, a major options expiry event threatens to disrupt an already volatile market.
Options are financial derivatives that give buyers the right to either buy or sell an underlying asset at a preset price before a specified expiration date. Call options give the right to buy, while put options give the right to sell.
This Friday at 8:00 UTC, 146,000 Bitcoin options contracts, worth nearly $14 billion and representing one BTC each, will expire on the cryptocurrency exchange Deribit. This represents 44% of the total open interest across all BTC options with varying expiration dates, making it the largest expiry event ever on Deribit. Additionally, ETH options valued at $3.84 billion will also expire. Since the Federal Reserve’s meeting, ETH has dropped nearly 12% to around $3,400. Deribit dominates the global crypto options market, accounting for over 80% of total volume.
Significant Open Interest to Expire In-the-Money
As of now, it’s expected that about $4 billion worth of Bitcoin options, roughly 28% of the total open interest of $14 billion, will expire “in-the-money” (ITM), meaning buyers will profit. These positions could either be closed or rolled over into the next expiry, which could further fuel market volatility.
Simranjeet Singh, a portfolio manager and trader at GSR, speculates that much of the open interest in both BTC and ETH could be rolled over into January 31 and March 28 expirations as the nearest liquidity points for the start of the new year.
The put-call open interest ratio for Friday’s expiry stands at 0.69, indicating that for every 10 call options, there are seven put options. This suggests a greater demand for calls, which typically offer asymmetric upside potential, signaling that traders are mostly positioned for upward momentum.
However, BTC’s bullish momentum has stalled since last Wednesday, when Federal Reserve Chairman Jerome Powell ruled out any potential purchases of Bitcoin and signaled fewer rate cuts for 2025. As a result, Bitcoin has dropped over 10%, currently trading at $95,000 according to CoinDesk indices.
This drop puts traders with leveraged bullish positions at risk of amplified losses. If they decide to exit their positions, it could trigger additional market volatility.
Risk of a Snowball Effect
Deribit’s CEO, Luuk Strijers, explained that the bullish momentum in the market has come to a halt, leaving the market highly leveraged to the upside. This positioning, he warned, increases the risk of a snowball effect should a significant downward move occur. “All eyes are on this expiry, as it could set the tone for the market heading into the new year,” Strijers stated.
Uncertainty Remains
As the record expiry event nears, there is noticeable directional uncertainty in the market. According to Strijers, “The much-anticipated annual expiry is about to conclude an impressive year for bulls. However, there is still uncertainty in terms of direction, which is reflected in the high volatility of volatility (vol-of-vol).”
Vol-of-vol measures fluctuations in an asset’s volatility. High vol-of-vol means the asset’s price is highly sensitive to news and economic data, which can cause rapid price changes and demand frequent position adjustments and hedging.
A More Bearish Outlook for ETH
Current options pricing shows a more bearish outlook for ETH compared to BTC. Andrew Melville, a research analyst at Block Scholes, noted that while the volatility smile for BTC has remained relatively unchanged, ETH’s implied volatility for calls has dropped significantly. A volatility smile represents the implied volatility of options at various strike prices but with the same expiration date. The drop in ETH’s implied volatility suggests a weakening demand for bullish bets on Ethereum.
This trend is also evident in the options skew, which compares how much investors are willing to pay for calls versus puts. For ETH, the put-call skew ratio is notably more bearish, at 2.06% in favor of puts, compared to BTC’s more neutral 1.64%. This indicates a greater bearish sentiment toward ETH.
Overall, the market heading into the year-end appears moderately less bullish than earlier in December, particularly for ETH, which shows a more bearish trend compared to Bitcoin.
