On December 26th, the largest expiry of Bitcoin options in terms of notional value will occur.
Tomorrow is likely to be a boring and volatile day, as major financial institutions force prices to stay the same to maximize profits on expiring contracts.
However, once that event ends and January begins, an explosive rally could occur barring any major bad news impacting the top cryptocurrencies.
Large expiry event
Approximately $23.7 billion of BTC options have expired. If Ethereum (ETH) and other assets are added, the total amount is approximately $28 billion.
An option is a contract that gives a trader the right to buy (call) or sell (put) Bitcoin at a specific price by a specific date. When these contracts expire, they must be settled.
The $28 billion expiration means a huge amount of capital is involved in these bets. Markets need to “hedge” their positions to avoid losses.
Market makers (MMs) typically write options that retail traders buy (sell). The MM makes the most money when the option expires and becomes worthless. The price point at which most options expire worthless is called the “max pain” price.
MMs buy BTC when the price goes down and sell BTC when the price goes up, in order to maintain market neutrality. This enables risk management.
This constant buying low and selling high by the MM creates a “suppressing” force. Keep prices strictly within a range.
“Ancolin Spring”
Once the expiry date has passed (usually Friday at 8:00 AM UTC), the MM no longer needs to hedge these positions. The “oppressive weight” is lifted. This usually leads to a recovery in volatility.
The market may temporarily fall to “look for liquidity” before potentially moving higher. The algorithm pushes the price down, causing “stop-loss” orders from nervous traders.
Historically, January sees capital inflows, which is a bullish situation for BTC.
Since expirations are (in principle) in a neutral to bullish direction, a downside is considered unlikely.
That said, “thin” markets are easier to manipulate. Relatively small orders can cause large price fluctuations as there are fewer buyers/sellers absorbing the price.
