Crypto Traders Brace for Nearly $5B Bitcoin and Ether Options Expiry

On Friday at 08:00 UTC, a total of 1.217 million bitcoin (BTC) and ether (ETH) options contracts with a notional value of $4.8 billion will expire on leading crypto options exchange Deribit.

Roughly 10% or 117,000 contracts out of the total are tied to bitcoin, while the rest are ether options. On Deribit, one options contract represents one BTC and one ETH. Options are derivatives that give the purchaser the right to buy or sell the underlying at a pre-determined price at a later date.

These derivatives contracts will be valuable or worthless depending on how the top two cryptocurrencies trade by the end of the week.

Both seasoned traders and retail investors track monthly and quarterly options expiries, given their propensity to influence markets ahead of and following the settlement.

"Quarterly expiries are typically the most significant in terms of volume and value. For instance, last June witnessed expiries totaling $5.4 billion, while March saw $5.2 billion. The current quarter is consistent with the preceding ones in 2023," Luuk Strijers, chief commercial officer at Deribit, told CoinDesk.

"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," Strijers added.

The max pain for bitcoin and ether September expiry options is $26,500 and $1,650. At press time, bitcoin and ether changed hands at $26,100 and $1,580.

Max pain is the level where options buyers stand to lose most money on expiration. The theory is that writers or sellers of options look to keep prices pinned near the max pain point while heading into the expiry to inflict maximum pain on buyers. They do so by purchasing and selling the underlying asset in the spot/futures markets.

Another feature that makes quarterly settlements important is the hedging activities of market makers or entities tasked with creating liquidity in an order book.

Market makers looking to hedge their gamma exposure and maintain a market-neutral book by actively buying and selling the underlying asset as expiry nears. Gamma refers to the rate of change of delta or sensitivity of an option's price to the changes in the underlying asset's price.

When market makers' gamma exposure is net positive, they "buy low and sell high" in the spot market, arresting price volatility. On the other hand, they buy high and sell low, amplifying price moves when their net gamma exposure is negative.

Strijers doesn't foresee a volatility explosion while heading into the event.

"In the past month, we have seen stable markets whilst the Gamma of the September expiries has increased gradually as a function of time. 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," Strijers said.

According to Options Insights founder Imran Lakha, ether dealers predominantly hold long gamma positions near $1,650-$1,700, which means these levels could act as glue ahead of the expiry.

Griffin Ardern, a volatility trader from crypto asset management firm Blofin, said the same is the case with bitcoin.

"The possibility of price stabilization is very high. The option expiring on Sep. 29 has a very significant positive gamma. As the expiration date approaches, the gamma will become larger and larger, thus exerting a powerful attraction on the price," Ardern said.

"Friday’s quarterly settlement price is more likely to be near the peak gamma exposure levels, which are $26,000-$27,000 for BTC, and $1,500 or $1,650 for ETH," Ardern added.