Crypto markets brace for a thrilling showdown as volatility meets options expirations, creating the perfect storm at Deribit.
Anticipating an eventful week, the crypto markets find themselves at the crossroads of diminishing volatility and the imminent expiration of options contracts as investors reassess their strategies amidst a recent rally. Deribit, a prominent exchange, stands at the center of this juncture, with approximately 150,000 bitcoin options contracts, valued at approximately $4.5 billion, scheduled to expire on Friday. Simultaneously, the exchange holds around $2.3 billion worth of ether (ETH) options contracts expiring on the same date.
Quarterly Expiration: Potential Impact on BTC and ETH Prices
Shaun Fernando, Deribit’s Chief Risk Officer, expressed that the reduced level of $26,000 for BTC Max Pain could potentially ease the downward price pressure that has been prevailing post-expiration. He highlighted the striking open interest of over $350 million at the $30,000 strike, indicating an exciting culmination as the quarterly expiration approaches. This event holds the potential for price turbulence as various gamma hedging strategies come into play, creating an exhilarating and dynamic market environment.
According to Youwei Yang, the Chief Economist at Bit Mining Limited, analysts concur that monitoring open interest is crucial. He notes that open interest in cryptocurrency derivatives has surged to its highest levels since the FTX incident in late 2022. This week, a substantial number of positions are set to expire and settle, making it an important period to observe in the market.
Unveiling The Dynamics: Implied Volatility And Shifting Tides In Bitcoin’s Second Quarter
When evaluating implied volatility, the strength and trajectory of the three notable market recoveries witnessed this year (in January, March, and June) have shown a gradual decline, suggesting a diminishing level of market greed.
However, with the second quarter nearing its conclusion, the volatility curve for the lower range of bitcoin is once again shifting upwards. Notably, the implied volatility of put options has surpassed that of call options.
Yang further commented that this shift signifies a transition in the options market from a state of greed to fear, highlighting growing apprehension among market participants regarding a potential market decline. Before the recent rally in the early part of this month, bitcoin experienced a dip below the $26,000 mark, leading traders to place bets against a rally using options contracts. The subsequent approximately 22% surge in bitcoin since June 14 caught short sellers off guard, as it unfolded contrary to their expectations.
With the expiration of options contracts at Deribit scheduled for 8:00 am UTC on Friday, there are indications that the token is on the verge of trading above the $30,000 threshold. Jan Sammut, Vice President of Marketing at Origin Protocol, revealed that a substantial number of calls have been opened with strike prices surpassing $30,000. Consequently, market makers and dealers find themselves in possession of a significant amount of negative or short gamma.
Sammut explained that if bitcoin manages to remain above $30,000, traders will likely engage in buying activities on the spot market, potentially triggering a gamma squeeze. However, should bitcoin fall below $30,000, traders would be inclined to sell on the spot market in order to offset their positions.
In a nutshell, this upcoming expiration is a spectacle that calls for popcorn, as you eagerly anticipate the unfolding drama,” remarked Fernando, Deribit’s representative.