The price of Bitcoin has been on a downward spiral over the past two weeks, falling from an all-time high of $42,000 to as low as $30,000. It has since bounced back to $34,000, but some analysts believe the bears will be in control for the foreseeable future.
A look at the derivatives market data can give a better explanation as to what is happening on institutional side and how the moves of larger players may impact the spot markets.
After peaking at $10.6 billion on Jan. 14, the open interest on Bitcoin scaled back to $8.4 billion. The Jan. 29 monthly expiry continues to stand apart, totaling 47% of the options in play.
While a $4 billion bitcoin options expiry could be significant, one must consider that these options are split among calls (neutral-to-bullish) and the more bearish put options. The opportunity to buy BTC for $52,000 on Jan. 29 might have made sense a couple of weeks ago, but not so much right now.
Deribit exchange remains the absolute leader with an 83% market share. To understand how eventful this expiry could be, one must adjust data and compare both calls and put options near the current $32,000 BTC level.
Most exchanges offer monthly expiries and some also hold weekly bitcoin options for short-term contracts. The previous largest expiry on record was $2.4 billion worth of options contracts that expired on Dec. 25, 2020.
This figure represented 31% of all open interest and displayed how options are usually spread throughout the year. The upcoming Jan. 29 expiry calendar accounts for 107,000 BTC, representing 45% of the aggregate options market open interest.
Ultra Bullish Bitcoin Options
As Bitcoin marked its new $42,000 all-time high, some ultra bullish call options were traded. However, as the BTC price adjusted, those short-term options became worthless.
As it stands, over 68% of the Jan. 29 call options at $40,000 and above should be disregarded for calculation. The same can be said for the bearish put options at $25,000 and below.
This leaves an estimated $745 million worth of call options below $40,000 for the aggregate options expiry on Jan. 29. Meanwhile, the more bearish put options above $25,000 amount to $300 million. Therefore, the adjusted Jan. 29 open interest stands at $1.05 billion while holding a 0.40 put-to-call ratio.
When analyzing options, the 30% to 20% delta skew is the single most relevant gauge. This indicator compares call (buy) and put (sell) options side-by-side.
A 10% delta skew indicates that call options are trading at a slight premium to the more bearish/neutral put options. On the flip side, a negative skew translates to a higher cost of downside protection and is a signal that traders are bearish.
The last time some bearish sentiment emerged was Jan. 10, when the Bitcoin price crashed by 15%. This move was followed by an extreme 30% to 20% delta skew as optimism reached 49, a level unseen over the previous past 12 months.
Whenever this indicator passes 20, it reflects the fear of potential price upside from market makers and professionals and is considered bullish. While a $4 billion bitcoin options expiry might be troublesome, nearly 74% of the options are already deemed worthless.
Despite bulls having an overall advantage, the more bearish put bitcoin options dominate expiries between $33,000 and $35,000. Overall there’s not much to gain from either side to create additional volatility ahead of Jan. 29.
