Friday Focus: $4.5 Billion Bitcoin Anticipation

• The cryptocurrency derivatives exchange, Deribit, is set to see the expiration of approximately $4.5 billion worth of Bitcoin options contracts on Friday.
• Another $2.3 billion worth of Ether contracts are also set to expire on the same day.
• Bitcoin options expiring on Friday make up about 45% of the total open positions, with most of them concentrated around the $30,000 strike price.

Understanding the Implications of the Options Expiry

Deribit, a Panama-based exchange, controls about 85% of the global crypto options market. Options contracts are derivative instruments that give the buyer the right to buy or sell an underlying asset at a specified price on or before a certain date. There are two types of options contracts: call options, which give the right to buy, and put options, which give the right to sell.

An options contract consists of several elements: the underlying asset (in this case, Bitcoin), the expiration date (after which the contract becomes invalid), the strike price (the price level at which the buyer has the right to buy or sell the asset at expiration), the type of option (call or put), and the option price (the price or premium the buyer pays to the seller for the right to buy or sell the asset at the strike price at expiration).

Anticipating Market Movements Post-Expiry

According to Shaun Fernando, Chief Risk Officer at Deribit, the drop in BTC Max Pain (optimal loss point) to $26,000 could potentially ease the current downward pressure on prices after the options expiry. Fernando noted that there is an impressive open position of over $350 million at the $30,000 strike price, suggesting that the upcoming quarterly expiry could result in price fluctuations due to different ‘gamma hedging’ strategies.

Gamma hedging, or gamma risk hedging, is a risk management strategy used in derivative markets. This strategy helps options traders manage their delta risk.

Triggering a ‘Gamma Squeeze’

Jan Sammut, Vice President of Marketing at Origin Protocol, stated that if the price stays above $30,000, traders who have bought a large amount of call options at this level could trigger a ‘gamma squeeze’. This would result in a sharp upward price movement as traders buy in the spot market. However, if Bitcoin falls below $30,000, traders may close their positions by selling in the spot market.

As of the time of writing, Bitcoin is trading below $30,000. The market is closely watching the upcoming options expiry and its potential impact on Bitcoin’s price volatility.