Crypto volatility, options expirations create perfect storm

Billions of dollars in options contracts are going to expire this week, and the recent rally has caught short sellers off guard

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With dropping volatility and looming end-of-quarter options contracts expirations, crypto markets are poised for an interesting week. Analysts say the recent rally has investors rethinking their positions. 

Exchange Deribit has around 150,000 bitcoin options contracts worth about $4.5 billion set to expire on Friday. The exchange also has about $2.3 billion worth of ether (ETH) options contracts expiring on the same date. Bitcoin (BTC) and ether were trading at $30,701 and $1,896, respectively, at time of publication. 

“BTC Max Pain at a significantly reduced level of $26,000 might alleviate the prevailing downward pressure on prices following the expiration,” Shaun Fernando, chief risk officer at Deribit, said. “With an impressive open interest of over $350 million at the $30,000 strike, the approaching quarterly expiration promises an exhilarating conclusion, carrying the potential for price turbulence amidst diverse gamma hedging strategies.”

Analysts agree, open interest is a key area to watch. 

“Cryptocurrency derivatives’ open interest has recently reached its highest levels since the FTX incident in late 2022, with a significant number of positions expiring and settling this week,” Youwei Yang, chief economist at Bit Mining Limited, said.

“When considering implied volatility, the magnitude and slope of the three strong rebounds this year (January, March, and June) have progressively weakened, indicating a lack of greed in the market.”

But, as the end of the second quarter looms, the volatility curve for the lower end of bitcoin is tilting upwards again, with the implied volatility of put options surpassing that of call options.

“This indicates that the options market has transitioned from greed to fear, as market participants become increasingly concerned about a market decline,” Yang added. 

Prior to the rally earlier this month, bitcoin dipped below $26,000, pushing traders to bet against a rally using options contracts. Bitcoin’s roughly 22% rally since June 14 was not what short sellers had anticipated. 

Now, the token looks poised to be trading over the $30,000 level on Friday, when options contracts at Deribit expire at 8:00 am UTC. 

“Basically, traders have opened a huge amount of calls at greater than $30,000,” Jan Sammut, vice president of marketing at Origin Protocol, said. “Therefore, market makers and dealers are holding a large amount of negative, or short, gamma.” 

If bitcoin stays above $30,000, Sammut said, traders are going to buy on the spot market, fueling a gamma squeeze. But, if bitcoin dips below $30,000, traders are going to sell on the spot market to cover their positions. 

“In summary, this impending expiration is one to break out the popcorn as you prepare to witness the unfolding drama,” Deribit’s Fernando said.

Updated Jun. 28, 2023 at 8:59 am ET: Shortened headline.


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