The market is poised for a record $14B Bitcoin options expiry, amid significant leverage across positions.

The upcoming options expiry is expected to stir up a highly leveraged market, according to Deribit. As the year draws to a close, a major options expiry event is poised to bring additional volatility to the already unpredictable market.

Options are derivative contracts that grant the holder the right to either buy or sell an underlying asset at a set price before a specified date. Call options provide the right to buy, while put options grant the right to sell.

On Friday at 8:00 UTC, a massive $14 billion worth of Bitcoin options, representing 146,000 contracts, will expire on the Deribit exchange. These contracts represent one Bitcoin each and make up 44% of the total open interest across various Bitcoin options expirations, marking the largest expiry event in Deribit’s history. Along with the Bitcoin expiry, Ethereum options worth $3.84 billion will also mature, with ETH having fallen nearly 12% to $3,400 since the Federal Reserve meeting. Deribit holds more than 80% of the global crypto options market share.

Expiring In-the-Money Positions

As of now, it’s expected that $4 billion worth of Bitcoin options, approximately 28% of the total open interest of $14 billion, will expire “in-the-money” (ITM), meaning that buyers of these options will lock in profits. These positions may either be closed or rolled over into later expirations, which could trigger increased volatility in the market.

Simranjeet Singh, a portfolio manager at GSR, suggested that much of the open interest in both Bitcoin and Ethereum could be rolled over into January 31 and March 28 expirations, as those dates represent key liquidity points for the start of the new year.

With a put-call open interest ratio of 0.69 for Friday’s expiry, it means there are seven puts for every 10 calls outstanding. The higher demand for call options, which typically offer more upside potential, suggests that traders are mostly positioned for continued upward momentum in the market.

However, Bitcoin’s bullish trend has stalled since last Wednesday, when Federal Reserve Chairman Jerome Powell dismissed any possibility of the Fed purchasing Bitcoin and signaled fewer rate cuts in 2025. Bitcoin has since dropped over 10%, now hovering around $95,000 according to CoinDesk indices.

This decline places traders with leveraged long positions in a precarious position, risking greater losses if they exit their positions. A sell-off could further fuel market volatility.

Rising Risk of Market Instability

Luuk Strijers, CEO of Deribit, warned that with bullish momentum now faltering, the market remains heavily leveraged to the upside. This positioning raises the likelihood of a rapid downturn if significant negative price action occurs. “The focus is on this expiry, as it could set the tone for the market heading into the new year,” Strijers said.

Market Uncertainty Continues

As the record expiry event approaches, uncertainty about price direction persists, with the market showing signs of increased volatility. Strijers noted, “The much-anticipated annual expiry is about to close an extraordinary year for bulls. However, the lack of direction is evident, with volatility-of-volatility (vol-of-vol) levels remaining high.”

Volatility-of-volatility refers to fluctuations in an asset’s volatility. Higher levels indicate that price movements are more sensitive to external news or economic data, making the market prone to sharp price adjustments and requiring more frequent hedging.

Bearish Sentiment for ETH

The options market is signaling a more bearish outlook for Ethereum compared to Bitcoin. According to Andrew Melville, a research analyst at Block Scholes, the volatility smile for Bitcoin remains stable, while the implied volatility for Ethereum calls has decreased significantly. A volatility smile shows how implied volatility changes for different strike prices of options with the same expiration date, and a drop in implied volatility for Ethereum calls suggests weaker demand for bullish positions on ETH.

This is also reflected in the options skew, where ETH’s put-call skew ratio has shifted more toward the bearish side, at 2.06% in favor of puts, compared to Bitcoin’s 1.64%, which is more neutral. This indicates that investor sentiment for ETH is more bearish than for Bitcoin.

Overall, as the year-end approaches, the market’s positioning is showing a more subdued outlook, particularly for Ethereum, which is facing a more bearish trend than Bitcoin.