This Friday heralds a pivotal moment for the cryptocurrency markets, with a staggering $15.2 billion in bitcoin and ether options set to expire on Deribit, the leading crypto options exchange. This event, one of the largest of its kind, could unleash significant bullish volatility, especially around the $70,000 mark for bitcoin, as market dynamics and dealer hedging come into play.
A Potential Surge in Market Volatility
The significant expiry includes $9.5 billion in bitcoin options and $5.7 billion in ether options, making up a large portion of the total notional open interest. With such a substantial amount due for settlement, the market could experience heightened volatility. Observers note that a large portion of these options are set to expire in-the-money (ITM), potentially exerting upward pressure on prices.
The Role of Dealer Hedging
Dealer hedging activities are anticipated to play a crucial role in the upcoming volatility. According to David Brickell from FRNT Financial, the gamma positioning of dealers, particularly around the $70,000 strike price for bitcoin, could lead to sharp movements in price as expiry approaches. This forced hedging, due to the large gamma position held by dealers, is expected to intensify price fluctuations, possibly leading to a choppy market environment.
The Max Pain Theory and Market Expectations
The max pain points for bitcoin and ether’s quarterly expiry stand at $50,000 and $2,600, respectively, indicating the price levels at which option buyers could face the most significant losses. Historically, prices have tended to gravitate towards these max pain points before rallying post-expiry. As the current market rates are substantially higher, this expiry could diverge from the usual pattern, potentially removing the downward pressure associated with max pain levels.
As the cryptocurrency community braces for this considerable expiry, the interplay between in-the-money options, dealer hedging, and the max pain theory suggests a complex scenario. Market participants will be closely monitoring the impact of these dynamics on the price of bitcoin and ether, with many anticipating potential bullish movements in the wake of the expiry.
