As Bitcoin (BTC) options contracts worth billions of dollars are set to expire on Friday, the cryptocurrency could experience significant price fluctuations heading into the weekend. Data from Amberdata reveals that the quarterly expiration on the leading crypto options exchange, Deribit, includes 81,052 call options worth $2.24 billion and 60,261 put options worth $1.73 billion. Deribit, which represents nearly 80% of global crypto options activity, will settle the quarterly options at 08:00 UTC on Friday. On Deribit, one options contract is equivalent to 1 BTC.
"The street is potentially short gamma on the top side. That plus thin liquidity could lead to big chops in both directions," said Dick Lo, CEO and co-founder of TDX Strategies, emphasizing the massive quarterly options expiration on Friday.
Options are derivative contracts that grant the buyer the right, but not the obligation, to purchase or sell the underlying asset at a predetermined price on or before a specific date. Call options provide the right to buy, while put options offer the right to sell. Options are employed by investors to protect their positions in the spot or futures market against unfavorable price movements and to speculate on future trends in valuations and volatility.
Market makers or dealers, who create liquidity in an order book by generating buy and sell orders, are on the other side of the transaction. Market makers profit from the spread between the bid and ask prices and trade the underlying asset to maintain a market-neutral net exposure. Their hedging activity frequently results in volatility, particularly leading up to major expirations like the one scheduled for Friday.
This month, Bitcoin has surged by 23%, primarily due to the U.S. banking crisis and the subsequent decline in Federal Reserve interest-rate expectations. The rally sparked demand for call options at higher strike prices, leaving market makers with a large negative or 'short gamma' position on the top side. Holding a sell position in call options, which provide protection against price increases, means being short gamma on the top side.
If Bitcoin's gains continue ahead of the weekend, market makers will be compelled to hedge their short gamma exposure by purchasing the cryptocurrency in the spot or futures market, potentially leading to greater upside volatility.
"Liquidity, as measured by the 2% market depth, slipped to 10-month lows early this month, making it hard for traders to execute large deals without causing price movements," said Griffin Ardern, a volatility trader from crypto asset management firm Blofin.
As of press time, Bitcoin was trading near $28,600, up 1% for the day, according to Google Finance data.
