Major crypto options exchanges, including industry leader Deribit, are due to settle billions of dollars’ worth of bitcoin options contracts on Friday. Analysts don’t expect the monthly expiration to have a notable impact on bitcoin, which is under pressure this week due to macro risks and regulatory concerns.
Tang explained that if bitcoin breaks above $50,000, traders who sold calls in anticipation of a bearish move or consolidation may resort to hedging – buying the cryptocurrency in the spot or futures market to mitigate losses arising from the short call position. That could put upward pressure on the cryptocurrency, accelerating gains.
Options are derivative instruments that give the purchaser the right to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option gives the holder the right to buy, while the put buyer gets the right to sell. Open interest refers to a number of calls and put option contracts traded but not squared off with an offsetting position. A call buyer is implicitly bullish on the market, while a put buyer is bearish.
The chart shows maximum call option open interest is concentrated at strikes higher than bitcoin’s current market price, also known as out-of-the-money (OTM) calls. Most of the put options are located at lower strikes. So, the majority of options appear set to expire worthless unless bitcoin charts a big move before 08:00 UTC Friday, the designated expiry time on Deribit, where one option contract represents 1 BTC.
Also, there is a notable build-up of call options open interest between $46,000 to $50,000. “The larger expiries were at $46,000, $48,000 and $50,000, creating time decay concerns late last week with spot stagnating in the $47,000 to $49,000,” range, Adam Farthing, chief risk officer at B2C2 Japan, said. “Down here [around BTC’s current price], we only have $44,000 and $40,000 with any size on them (open interest 2,500 and 1,500, respectively), we’ve kind of moved away from the problem down here.”
“As far as the BTC options market is concerned, the trading volume is actually not very large compared to the current market value of BTC,” Allen Wang, head of trading at Babel Finance, said. “In a mature market, the average daily trading volume of options is about five to 20 times the trading volume of the underlying asset itself.
The Sept. 24 expiry risk reversals, which measure the difference between the implied volatility of out-of-the-money (OTM) calls and OTM puts, have come off sharply from -5 to -20 this week. The greater the demand for an options contract, the greater its volatility and its price. Therefore, the decline in risk reversals indicates investors are adding downside protection.
The cryptocurrency fell for the third straight day on Tuesday, penetrating the $40,000 mark for the first time since early August on concerns surrounding Chinese real estate developer Evergrande Group’s debt crisis and fears that the U.S. Federal Reserve will begin to wind down its stimulus program soon. The selling aggravated after U.S. Securities Exchange and Commission Chairman Gary Gensler compared stablecoins to poker chips and reiterated the call to regulate the cryptocurrency industry.
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