The highest amount of Bitcoin options ever is set to expire this Friday, which might put some temporary selling pressure on the largest cryptocurrency.
$5.5B in options contracts come due tomorrow, according to derivatives data platform Bybt. Options are investment contracts which give traders the right but not the obligation to sell or buy a security for a predetermined price.
The amount in contracts due is significant as expiring options have historically impacted the spot price. For example, the BTC price has dropped an average of 2% in the week leading up to the last three months’ last Fridays, days which have the highest monthly open interest due. The weeks following have averaged 12% gains.
According to Bybt, 90% of the open interest comes via the Deribit derivatives platform, and the “max pain” level is $40K. Max pain is defined as the price of an asset at which option sellers (of both calls and puts) will owe the least amount of money to option buyers. The max pain price incentivizes option sellers to push an asset’s price towards it as the options approach expiry, minimizing the option writers’ losses.
As option writers are often professional market makers commanding large amounts of wealth, their concentrated financial capital can typically outweigh individual option buyers’ ability to manipulate the market towards their profit-maximizing price.
The max pain level can be both above or below an asset’s spot price. The max pain price is more than 10K below BTC’s current price, a sign there may be selling pressure until Friday.
As BTC has 88% price correlation with Ether according to crypto exchange Coinbase, the downward pressure has implications for the Ethereum network and by extension, DeFi.
Ether with Its Own Downward Pressure
Ether has a max pain point of $1,120 for Mar. 26 according to options analytics platform CoinOptionsTrack, compared with its current price of $1,576. As with Bitcoin, this means that this downward pressure is set to dissipate on Friday.
Open interest never hits zero as options are ongoing and expiry dates overlap. Still, the last Fridays of each month usually have the highest number of options expiring that day.
On the last Friday of February Ether option open interest dropped by roughly $650M according to data provided by Bybt. The ETH price plunged 25% from $1,934 to $1,452 in the week leading up to the Feb. 26 expiry and then rebounded 5% to $1,523 by the following Friday.
As open interest is at a similar level for March, the $650M can be used as a ballpark figure for the value of Ether options set to expire on Friday.
Overall Options Market Growing
Both the Bitcoin and Ether options markets are growing.
But bucking the trend, Ether’s OI across March remained fairly level which contrasts with the previous four months’ increases.