$1 billion in Bitcoin options contracts expire tomorrow, what happens?

Overview

• A large number of Bitcoin and Ethereum options contracts are set to expire on Friday.

• Some professionals say this could lead to market volatility.

• Likewise, it is possible that nothing will happen. In an options contract, traders have no obligation to buy the underlying asset after the contract expires.

According to Skew analytics, nearly $1 billion worth of Bitcoin options contracts are set to expire on Friday, with the value of those contracts slightly less than half of the existing contracts. Ethereum is not far behind. About $450 million worth of ETH options contracts are set to expire on the same day.

This could introduce a large amount of cryptocurrencies into the market as traders make the choice to sell or hold. Here’s what could happen.

What is an options contract?

Options contracts allow people to buy Bitcoin in the future at a pre-agreed price. So if you entered into an options contract when Bitcoin was worth about $4,000 during the mid-March crash, getting your Bitcoin at the same price on the last Friday of September would have been a wise decision (or a lucky bet), as the price of Bitcoin has more than tripled since then.

This is also the premise of Bitcoin futures contracts. But the difference between the two is that Bitcoin futures contracts stipulate a contractual obligation to buy Bitcoin when the contract expires. In options trading, traders are not obligated to buy all Bitcoin in the contract, but only have the option to do so.

Back to the topic

Bitcoin options contracts are big business. On Derebit, the largest options trading platform by volume, traders trade about $57 million worth of options contracts every day. As of yesterday, about $2 billion worth of Bitcoin options contracts had not yet expired. That means about half will expire on Friday. The same is true for Ethereum contracts.

So what happens after the contract expires? According to a Coin Metrics research note on ETH, “This event could add volatility to price action this week as traders look to hedge their exposure to these positions or preemptively act in the spot market.”

Charles Bovaird, a researcher at cryptocurrency research firm Quantum Economics, believes that the same is true for Bitcoin. “As these contracts approach expiration, volatility could spike as investors start to choose to buy, sell or let the contracts expire.”

Dan Gunsberg, CEO and co-founder of cryptocurrency trading platform Hxro, said most of the options contracts are priced between $11,000 and $12,000, far higher than bitcoin’s current price.

“By September 25, the market is effectively giving you 20:1 odds that the price will trade at or above $11,000.”

Hitting $11,000 isn’t breaking news; the price of bitcoin was already just above $11,000 on Saturday. But anything above normal “could cause some drastic changes.” Still, he said, “you can never predict cryptocurrencies.”

Bovaird added:

“If a large number of contract holders buy Bitcoin before the contract expires, it will put upward pressure on the price of the cryptocurrency. Similarly, if contract holders use options to sell, it will put downward pressure on the price of Bitcoin.”

“However, this is also likely to have a small impact. If the options contracts expire without being exercised (used), then they will not put upward or downward price pressure on Bitcoin.”