Volatility Expected in Crypto Market Ahead of Options Expiry
The crypto market is expected to experience a significant increase in volatility as we approach the end of the week. This comes as the monthly bitcoin (BTC) and ether (ETH) options contracts are set to expire on Friday, November 29th.
Understanding Options Contracts
An options contract gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price within a certain time period. The expiration of these contracts can lead to significant volatility in the market as investors look to close their bets and profit substantially.
Deribit Data Reveals $9.4 Billion in Notional Value
According to Deribit data, the total notional value of bitcoin options contracts set to expire on Friday is a staggering $9.4 billion. Breaking down this figure, we see that over $4.2 billion (45%) of the total notional value is ‘in-the-money’ (ITM).
Call Options Dominating
Out of the $4.2 billion in ITM options, almost 80% are calls, which are strike prices below the current market price. This could lead to significant volatility as investors look to close their bets and profit substantially.
Max Pain Theory
The max pain theory suggests that the market would move towards the range between $70,000 – $82,000, where most of the open interest is concentrated. However, Andre Dragosch, European head of research at Bitwise, believes this outcome is unlikely.
Out-of-the-Money (OTM) Options
Diving into the OTM options, we see that they are significantly dominated by puts, with over $4.1 billion (98%) in OTM puts out of a total notional value of $5.2 billion (55%). This suggests that traders were either hedging against downside risk or making bearish bets that will most likely not materialize.
Market Impact
The concentration of puts in the market is likely due to hedges rather than outright downside bets, according to Dragosch. This means that investors may be left with significant unrealized losses, which could put less downwards pressure on the market.
Bitcoin Price and Max Pain Price
As bitcoin’s price is significantly higher than the max pain price of $78,000, many call options are deep in the money. This could lead to a further rally potentially taking bitcoin to the psychological level of $100,000.
Market Makers and the Rally
Market makers may be forced to hedge by purchasing bitcoin, which could fuel a further rally. This is because the large difference between max pain and the current bitcoin spot price leaves many call options deep in the money.
Conclusion
The crypto market is expected to experience significant volatility as we approach the end of the week. The expiration of options contracts can lead to significant movements in the market, and investors should be aware of these potential risks and opportunities.
Market Expectations
Some investors may expect the market to move towards the range between $70,000 – $82,000, but this outcome is unlikely according to Dragosch. Instead, he believes that there will be a temporary consolidation amid elevated sentiment and high profit-taking.
Volatility Ahead
The volatility we can expect in the coming days is likely due to a combination of factors, including the expiration of options contracts and the large difference between max pain and the current bitcoin spot price.
Market Makers and Their Role
Market makers play a crucial role in providing liquidity to the market. However, their actions may be influenced by the expiration of options contracts, which could lead to further volatility.
Investor Behavior
Traders were either hedging against downside risk or making bearish bets that will most likely not materialize. This behavior suggests that investors are cautious and looking for opportunities to profit from potential price movements.
BTC Open Interest Ratio
The put-call open interest ratio is still hovering near the highest level since March 2024, indicating a disproportionate concentration of puts in the market.
Max Pain Price and Market Impact
As bitcoin’s price is above $98,000 significantly higher than the max pain price of $78,000, many call options are deep in the money. This could lead to significant losses for option holders and maximum profits for market makers who are selling these options.
Further Rally
The potential for a further rally taking bitcoin to the psychological level of $100,000 is high due to the large difference between max pain and the current bitcoin spot price.
Hedging and Market Makers
Market makers may be forced to hedge by purchasing bitcoin, which could fuel a further rally. This is because the large difference between max pain and the current bitcoin spot price leaves many call options deep in the money.
Conclusion
The crypto market is expected to experience significant volatility as we approach the end of the week. The expiration of options contracts can lead to significant movements in the market, and investors should be aware of these potential risks and opportunities.
Recommendations
Investors should consider their exposure to the market ahead of the expiration of options contracts. Those with call options may need to adjust their positions to avoid losses, while those with put options may look to profit from potential price movements.
Disclaimer
The information provided in this article is for informational purposes only and should not be considered as investment advice. Investors should consult with a financial advisor before making any investment decisions.
