$1 billion in Bitcoin options expire tomorrow. Here’s what that means

The Bitcoin options market is about to see its largest options expiration yet. Should we expect price waves?

A billion dollar batch of Bitcoin options is set to expire tomorrow—and that means a $1 billion question mark on where the price of Bitcoin is headed next, depending on whether traders decide to take their options or walk. 

Data from Skew indicates that some 114,000 options contracts from across Bitcoin’s regulated and unregulated derivatives markets are set to expire tomorrow. This could mean Bitcoin’s markets could be in for some volatility starting tomorrow, as traders decide to either sell, buy or cast aside the options they’ve taken out to trade Bitcoin.

But a market move isn’t guaranteed. Nicholas Pelecanos of the NEM Venture Fund told Decrypt that, in reality, the contracts’ expiration might not have a large impact on price. Most of the options that traders picked, he said, are either too low on the sell side or too high on the buy side.

“I don’t expect that the expiration will have a massive impact on the BTC price. The open interest is largest on calls around $10k and puts below $9K,” he said, meaning that those who took out these options won’t make any profit on the trade if they pull the trigger.

In Bitcoin as in other markets, options are a financial derivative which give traders the option (but not the obligation) to purchase an asset at a pre-specified price at a later date (typically, traders pay a premium for this privilege). A “call option” means you have the option to purchase an asset while a “put option” gives you the right to sell it. The price levels traders buy at are called strikes, and these strikes expire some months after the bet is placed.

In practice, it could look like this: Bob buys a call option on Bitcoin with a strike price of $7,000 on January 25 with an expiration on June 25; since Bitcoin is trading just above $9,000, Bob would likely follow through with his buy order since his strike price (what we would be paying for the bitcoin) is $7,000.

Most of these contracts come from Deribit, an unregulated Bitcoin derivatives exchange that has enjoyed a meteoric rise to prominence this year. The newcomer has $1.2 billion in outstanding Bitcoin options contracts alone, while the next biggest competitor is the regulated CME exchange with $441 million in outstanding options trades. 

Interest from the suits trading at the CME is a good sign, Pelecanos said. Even if the options market does not move Bitcoin tomorrow, the interest from institutions should lay a good foundation for continued growth.

“What is interesting to note is the size and location of the flow, and the fact that a lot of the volume is on CME means it’s likely large institutions. Long term, more institutional interest should equate a higher spot price,” he said.

Adding to this sentiment, Philippe Bekhaz, CEO of cryptocurrency finance firm XBTO, said that he expects “open interest will continue to grow on Deribit and CME” alike. As Bitcoin enjoys greater publicity and exposure in financial circles, a more liquid options market should “open up sophisticated strategies that appeal strongly to institutional options traders,” he concluded.

So while we might not get any major price action immediately, that could be because traders are gearing up for a marathon—not a sprint.