Just when you thought the year-end couldn’t get any more intriguing, a significant options expiry is set to shake things up in this highly levered-up market.
Options are derivative contracts that give the purchaser the right to buy or sell the underlying asset at a preset price at a later date. A call option provides the right to buy, while a put option gives the right to sell.
On Friday at 8:00 UTC, 146,000 bitcoin options contracts, valued at nearly $14 billion and sized at one BTC each, will expire on the crypto exchange Deribit. This notional amount represents 44% of the total open interest for all BTC options across various maturities, making it the largest expiry event ever on Deribit.
Alongside, ETH options worth $3.84 billion will also expire. Since the Fed meeting, ETH has dropped nearly 12% to $3,400. Deribit dominates with over 80% of the global crypto options market.
Significant OI to Expire ITM
As of now, it’s estimated that $4 billion worth of BTC options, roughly 28% of the $14 billion total open interest, will expire “in the money (ITM),” potentially yielding profits for buyers. These positions might be settled, rolled over to the next expiry, or could lead to increased market volatility.
“I suspect a fair bit of open interest in BTC and ETH will be rolled into Jan. 31 and Mar. 28 expiries as the nearest liquidity anchors at the start of the new year,” said Simranjeet Singh, portfolio manager and trader at GSR.
The put-call open interest ratio for Friday’s expiry stands at 0.69, meaning for every 10 call options, there are 7 put options. This higher open interest in calls suggests leverage is tilted towards the upside, providing asymmetric potential for buyers.
However, the bullish momentum for BTC has diminished since last Wednesday’s Fed decision, where Chairman Jerome Powell dismissed potential Fed purchases of cryptocurrency and hinted at fewer rate cuts in 2025.
BTC has since fallen over 10% to $95,000, per CoinDesk indices data. This drop puts traders with leveraged bullish positions at risk of substantial losses, potentially leading to increased market volatility if these positions are liquidated.
“The previously dominant bullish momentum has stalled, leaving the market highly leveraged to the upside. This positioning increases the risk of a rapid snowball effect if a significant downside move occurs,” Deribit’s CEO Luuk Strijers told CoinDesk.
“All eyes are on this expiry, as it has the potential to shape the narrative heading into the new year,” Strijers added.
Directional Uncertainty Lingers
Key options-based metrics show there’s considerable uncertainty in the market about potential price movements as this record expiry nears.
“The much-anticipated annual expiry is poised to conclude a remarkable year for the bulls. However, directional uncertainty lingers, highlighted by heightened volatility of volatility (vol-of-vol),” Strijers remarked.
Volatility of volatility (vol-of-vol) measures how much an asset’s volatility fluctuates, indicating potential rapid price changes and the need for aggressive hedging.
Market More Bearish on ETH
The pricing of options set to expire reveals a more bearish outlook for ETH compared to BTC.
“Comparing the vol smiles of the [Friday’s] expiration between today and yesterday, we see that BTC’s smile is almost unmoved, while ETH’s implied vol of calls has dropped significantly,” said Andrew Melville, research analyst at Block Scholes.
A volatility smile shows implied volatility across different strike prices for options expiring at the same time. The drop in implied volatility for ETH calls suggests a reduced demand for bullish bets, pointing towards a more pessimistic view of Ethereum’s native token.
This is also reflected in the options skew, showing investors are more inclined towards puts for ETH, indicating a bearish tilt.
“After more than a week of poorer spot performance, ETH’s put-call skew ratio is more strongly bearish (2.06% in favor of puts compared to a more neutral 1.64% towards calls for BTC),” Melville noted.
Overall, the end-of-year positioning reflects a moderately less bullish market than seen earlier in December, particularly more pronounced for ETH than for BTC.
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