US$15 billion options delivery is imminent, is big volatility coming?

Author: Mary Liu, BitpushNews

Crypto markets rebounded slightly on Thursday, with Bitcoin climbing from an intraday low of $68,855 in the early morning hours to a high of $71,635 in the afternoon, but has since retreated and stabilized around $70,000 ahead of major options expiration on Friday.

On the altcoin front, Dogecoin (DOGE) surged nearly 20% and is now trading above $0.22 for the first time since December 14, 2021, while Bitcoin Cash (BCH) gained 13% ahead of the expected halving event on April 4 %.

U.S. stocks also rose, with the S&P 500 index rising in late trading. Investors are looking to tomorrow’s personal consumption expenditures (PCE) report. Although inflation is expected to rise slightly, the impact on the stock market will be delayed as the U.S. market is closed for Good Friday. As of the close, the S&P and Dow Jones indexes rose 0.11% and 0.12% respectively, while the Nasdaq fell 0.12%.

US$15 billion options are about to be delivered

At 08:00 UTC on Friday, $15.2 billion worth of quarterly contracts on the crypto options exchange Deribit will expire for delivery. Bitcoin options are $9.5 billion, accounting for 62% of the total notional open interest to be settled, and the remainder are Ethereum options. .

Deribit data shows that the $15 billion expiration is the largest in the exchange’s history, and the expiration will eliminate 40% and 43% of the total notional open interest in Bitcoin and Ethereum of various maturities.

Notional open interest is the dollar value of the number of active contracts at a given time. On Deribit, one options contract represents 1 BTC and 1 ETH. The exchange holds more than 85% of the global crypto options market. A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase an underlying asset at a preset price at a later date. A put option gives the right to sell.

Market volatility may occur

Luuk Strijers, chief commercial officer of Deribit, said that a large number of options will expire in the money (ITM), which may bring upward pressure or volatility to the market.

An In-the-Money Call (ITM) option has a strike price that is lower than the current market rate of the underlying asset. At expiration, an ITM call option gives the buyer the right to buy 1 BTC at the strike price (lower than the spot market price), thereby generating a profit. An In-the-Money Put option has a strike price that is higher than the current market rate of the underlying asset.

At a market price of about $70,000, $3.9 billion worth of Bitcoin options will expire in-the-money, accounting for 41% of the $9.5 billion in total open interest in the quarter to be settled. Likewise, 15% of ETH’s total quarterly open interest of $5.7 billion will expire in-the-money.

Strijers explained: “These levels are higher than usual, which can also be seen in the lower maximum pain point levels, due of course to the recent price increases. ITM expiration at higher levels could lead to potential upward pressure or volatility ”.

The biggest pain points for quarterly expiration of BTC and ETH are $50,000 and $2,600 respectively. The biggest pain point is that option buyers lose the most money. The theory is that option sellers (sellers), usually institutions or traders with sufficient capital supplies, want to fix the price near the greatest pain point to cause the maximum loss to the option buyer.

During the last bull run, Bitcoin and Ethereum had been pulling back towards their respective biggest pain points, but resumed their gains after expiration.

Strijers said similar dynamics may be at play, saying: “With expiration removing the biggest pain point at lower levels, the market could see upward pressure.”

Dealers or market makers hedging transactions will increase

David Brickell, head of international distribution at Toronto-based cryptocurrency platform FRNT Financial, said hedging activities by traders or market makers could increase volatility.

David Brickell said in a report: "The biggest impact, however, came from market makers’ Gamma positions in activity. Traders were short approximately $50 million in Gamma, with the majority concentrated at strikes around $70,000. With that, As expiration approaches, the Gamma position will become larger and the forced hedging will increase volatility around $70,000, resulting in some wild moves on either side of that level.”

Gamma measures the change in Delta, which measures the sensitivity of an option to changes in the underlying asset price. In other words, Gamma shows the amount of delta hedging a market maker would need to do to keep their net exposure neutral when prices move. Market makers must maintain market-neutral exposures while creating liquidity in the order book and profiting from the bid-ask spread.

When market makers short Gamma or hold short options positions, they buy high and sell low to hedge their books, causing market volatility.

The $69,000 support level is the most critical

Some traders are warning that if Bitcoin falls below the $69,000 level in the coming days, the entire market will pull back further.

“The short-term focus for traders will be to see if Bitcoin can retest Tuesday’s intraday low of near $69,500,” Alex Kuptsikevich, senior market analyst at FxPro, said in a report. “A break below that level could signal a more prolonged correction.”

Crypto analyst Bruce Powers believes that Bitcoin has been under attack near the resistance of the 78.6% Fibonacci retracement level for the past four days, facing resistance at 71,790 points, and has been trading above the 20-day moving average for the past few days. The uptrend remains intact, but the bearish divergence of the RSI suggests that the pullback may have further to go. A decisive rebound above this week’s high of 71,290 points will trigger a bullish continuation of the uptrend, with an initial new high target of around 77,660 points, which is determined by two Fibonacci levels.