On Friday at 08:00 UTC, leading crypto options exchange Deribit will see the expiry of a substantial number of cryptocurrency options contracts, totaling 1.217 million contracts with a notional value of $4.8 billion.
Of this total, approximately 10%, or 117,000 contracts, are linked to Bitcoin (BTC), while the remainder are Ethereum (ETH) options. Each options contract on Deribit corresponds to one BTC or one ETH.
Options Contracts Defined
Options are financial derivatives that grant the purchaser the right to buy or sell the underlying asset at a predetermined price on a future date.
Furthermore, these options contracts’ value hinges on how the top two cryptocurrencies perform by the end of the week. Traders, both experienced and retail investors, closely monitor monthly and quarterly options expiries, recognizing their potential to influence cryptocurrency markets leading up to and following the settlement.
Deribit CCO offers Insights into Quarterly Expiries and Their Influence
Luuk Strijers, Chief Commercial Officer at Deribit, notes that quarterly expiries tend to be the most significant in terms of volume and value. For instance, in June, expiries totaling $5.4 billion occurred, and March saw $5.2 billion. The current quarter follows this trend in 2023.
This September, $3 billion in BTC options and $1.8 billion in ETH options will expire, with the Max Pain level close to current price levels.
The max pain levels for Bitcoin and Ethereum September expiry options are $26,500 and $1,650, respectively. At the time of reporting, Bitcoin and Ethereum were trading at $26,100 and $1,580, respectively.
Max Pain and Its Significance
Max pain represents the price level at which options buyers are poised to incur the most significant losses upon expiry.
In addition, it is a theory that suggests options writers or sellers aim to keep prices near the max pain point as the expiry approaches to maximize losses for buyers. This is achieved by buying and selling the underlying asset in the spot and futures markets.
Hedging Activities of Market Makers
Quarterly settlements are also significant due to the hedging activities of market makers. These entities are responsible for creating liquidity in the order book. Market makers actively buy and sell the underlying asset as the expiry date approaches to hedge their gamma exposure and maintain a market-neutral position.
Moreover, Gamma refers to the rate of change of delta or the sensitivity of an option’s price to changes in the underlying asset’s price. When market makers have a net positive gamma exposure, they buy low and sell high in the spot market, stabilizing price volatility. Conversely, a negative net gamma exposure can amplify price movements.
Further, Strijers does not anticipate a surge in volatility leading up to the event. He notes,
The impact of an uneven distribution of Gamma amongst traders would have resulted in much more volatility as compared to what we have seen these days. Therefore, we don’t anticipate strong market moves in the coming week.
Stabilization Expected as Deribit Options Expire
Imran Lakha, founder of Options Insights, highlights that ether dealers predominantly hold long gamma positions near $1,650-$1,700, suggesting these levels could act as a price anchor ahead of the expiry.
Moreover, Griffin Ardern, a volatility trader from crypto asset management firm Blofin echoes this sentiment for Bitcoin, stating that the possibility of price stabilization is very high. Also, he anticipates Friday’s quarterly settlement price to align with peak gamma exposure levels, which are $26,000-$27,000 for BTC and $1,500 or $1,650 for ETH.