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A Billion Dollars of Bitcoin Options Expire Today, Volatility Expected

Editorial Team

Jun. 26, 2020

Will the expiration of $1 billion Bitcoin options finally move BTC?

Key Takeaways

The expiry of 114,700 BTC options could end BTC's four month volatility drought.
Put-call ratio implies options traders have flipped bullish in the last week.
The effect of options in legacy markets cannot be compared to the Bitcoin market, as the dynamics vary.

$1.06 billion or 114,700 Bitcoin options are set to expire at 8:00 AM UTC today. Traders are debating whether this will lead to volatility, and if so, in which direction.

Bitcoin Options Market Dynamics

Today marks the largest expiry of BTC options ever. There wasn’t even $1.06 billion of open interest in options until two months ago.

While the growth of options is exciting and signals institutional interest, market participants are focused on deciphering how this will impact the market.

Volatility has been sinking for months now, ever since Black Thursday.

Historically, BTC volatility cannot be suppressed for long. The expiry of 114,700 Bitcoin worth of options contract could catalyze volatility.

$7,000 and $8,000 puts, as well as $10,000 and $11,000 calls, have the most open interest, with a total value of 16, 700 BTC, or $154 million.

The put-call ratio measures the number of puts traders are purchasing versus the number of calls.

Since put options gain value when its underlying asset’s price reduces, a rising put-call ratio is a bearish indicator. This ratio has been trending down after a spike last week, however, implying there is positive sentiment in the options market.

Several other factors set Bitcoin options dynamics apart from that of legacy markets.

For example, legacy options contracts are almost entirely physically delivered (you receive/pay the underlying asset upon expiry). But in crypto, nearly all Bitcoin options are cash-settled.

Physically delivered creates movement in the spot markets on the date of settlement, which is responsible for the volatility.

This same dynamic doesn’t carry over to cash-settled derivatives. However, it does influence the flow of funds, and it does free locked up capital for institutional investors.

The bottom line is that volatility could still show up, but it isn’t a certainty given the cash-settled nature of BTC derivatives. This could change in the future as more venues start to offer physically delivered Bitcoin options.

Disclaimer