Almost 1 Billion in Bitcoin Options Expire Soon..

Cause For Alarm?

The Bitcoin futures and options market has expanded in the recent years. New service providers, aggressive leverage, variable expiry dates, and record setting open interest recently. These are classic signs that these derivative markets are thriving and operating along side the traditional price action of Bitcoin. The function of these products is to speculate on the future price of a very speculative asset.. The result is explosive!

Open Interest:

The figure above is a snap shot of the various platforms that users can write options on, and their relative level of open interest. It has recently peaked around $1.5 Billion, and that is 100% increase to the two months prior. Quite the spike in volume and market interest! This trend shows that investors and traders alike have been looking more frequently at Bitcoin options.

Fear Of Missing Out:

Below is a snapshot from the CME website which outlines their current distribution of futures hosted on their platform. There is a very heavy statistical skew to contracts written above 10k.

Did Investors panic and fomo when Bitcoin broke above 10k briefly? That seems to be the case, because at the time of writing we are currently sitting at a price of $9200/Bitcoin. Quick math shows that 80% of open interest is now locked up sitting above 10.8k - which does not seem likely at this moment in time.

These specific contracts expire Friday June 27th (one week from today). These contracts only add up $67 Million, which is proportionally low to their average traded volume (~$300 million). This tells me that it wont have too severe of an impact on the market. Its also important to note this was just one example from one service provider (CME), and it is proportional to the rest of the market: bullish skew above 10k.

Bearish Scenario:

Only situation for a call option to profit is for the price to rice above the strike level. This seems out of the question for the extreme call options written. As the expiry date rapidly approaches, it exerts a strong devaluation force onto the contracts. This is the downside to options trading.. It is very easy to lose all of your capital that put forward into a trade if you cannot offload the contracts onto other traders. 

If the options are exercised and the users fulfill their Bitcoin purchase agreements, there is going to be sell pressure introduced into the market. Depending on the contract price, traders could be left with heavy bags! In some scenarios its reasonable to assume that people would realize the loss on the Bitcoin themselves, rather than have their contracts expire and lose their contract premium costs. Its hard to speculate which is more likely, but regardless of the prospective outcome - there are a lot of contracts about to expire far below their owner's original expectations. 

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