45% of Bitcoin options will expire on January 29: what will be the effect on the price?
In eleven days we will witness the record expiry of $3.8 billion in Bitcoin options: will it be a bullish or bearish event?
Over the past two months, the open interest of options on Bitcoin has remained relatively stable even as the benchmark rose 118% to $8.4 billion during BTC’s rise to a new all-time high. The Bitcoin Code cryptocurrency rally and rising open interest in BTC options resulted in a historic $3.8 billion expiration scheduled for Jan. 29.
To understand the potential impact of an expiry of this magnitude, investors should compare it to the volumes recorded on spot exchanges. Although some data aggregators show daily volumes in Bitcoin between $50 billion and $100 billion, a report published in 2019 by Bitwise Asset Management revealed that many exchanges employ a variety of questionable techniques to inflate trading volumes.
This is why, when analysing volume on exchanges, it is advisable to source the figure from reputable data aggregators instead of relying on information provided by the exchanges themselves.
As the chart above indicates, BTC spot volume on exchanges has averaged $12 billion over the past 30 days, a 215% increase over the previous month. This means that the incoming $3.8 billion expiry corresponds to 35% of the average daily BTC spot volume.
Contracts offered on exchanges predominantly have monthly expirations, although some provide weekly options for short-term contracts. December 25, 2020 witnessed the largest ever expiry of $2.4 billion in option contracts. This figure represented 31% of all open interest and shows how options are usually spread out over the year.
Open interest in Deribit’s BTC options by expiry date
Genesis Volatility data shows that Deribit’s expiry calendar shows a 94,060 BTC expiry on January 29. This unusual concentration translates into 45% of its contracts set to expire in eleven days. A similar effect can be seen on the rest of the exchanges, although Deribit has an overall market share of 85%.
It should be noted that not all options will reach strike prices by expiration, as some of the strikes now seem unreasonable, especially considering that there are less than two weeks to go.
Bullish call options at $46,000 and above are now considered worthless, as are bearish put options below $28,000: in fact, 68% of them are worthless. This means that only 39% of the $3.8 billion options due to expire on 29 January are worth examining.
Analysing open interest offers data on trades already made, while the skew indicator monitors options in real time. This parameter is even more relevant as BTC was below $25,000 just thirty days ago. As a result, open interest near this level does not indicate strong pessimism among traders.
Market makers are unwilling to take upside risks
In options analysis, the 30%-20% delta skew is the most relevant parameter. This indicator compares call (buy) and put (sell) options.
A delta skew of 10% indicates that call options are trading at a premium to more bearish/neutral put options. Conversely, a negative skew translates into a higher cost of downside protection and signals that traders are pessimistic.