and remained steady as billions worth of options contracts expired this morning.
The leading cryptocurrency rose 1% early Friday morning, while ETH jumped 1.6%.
Bitcoin is currently trading at $26,509, down 11% over the past 30 days. In the same period, the second largest cryptocurrency by market cap decreased 4.6%.
Today, Deribit’s Bitcoin options expired this morning with a notional value of $2.26 billion and $1.25 billion for Ethereum, causing uncertainty in the market.
Notional value refers to the total number of outstanding option orders in the market that have not yet expired.
The Bitcoin options market has a put-to-call ratio of 0.44. Similarly, for ETH, each put option has two open call options. This suggests that traders usually hold bullish positions, which is probably why the price reacted negatively before the end.
A call option contract is a financial derivative that gives the holder the right, but not the obligation, to buy a specific asset—in this case, Bitcoin—at a predetermined price. A put option gives the holder the right to sell.
When an investor buys a call option, they are essentially betting that the price of the underlying asset will rise to the strike price before the option expires. The strike price represents the predetermined price at which the option is purchased.
For example, a May call option for a strike price of $27,000 would mean that for the buyer to make a profit, the price must be higher than $27,000 at its expiration.
Generally, the market tends to fluctuate towards the highest pain point near the expiration of the option. The highest pain point for today’s expiration event is $27,000 for Bitcoin and $1,800 for Ethereum, roughly current prices.
The maximum pain point in the options market refers to the price level when the buyers of the options have the largest losses.
Bitcoin, Ethereum low liquidity removed
It is expected that current market conditions of low liquidity will exacerbate the impact of the options expiration event.
Bitcoin liquidity dried up in Q2 2023 due to events such as the end of Binance’s Zero-fee trading program, banking crises, and macroeconomic issues such as the ongoing debt ceiling debate in the United States.
Co-founder of crypto research outlet Jarvis Labs Ben Lilly measures the decline in liquidity using the cumulative volume delta (CVD) metric for spot and futures markets. CVD measures the cumulative change in the volume of buy and sell orders as price moves.
It is used to analyze the flow of volume and can provide insights into the strength or weakness of a trend or price movement.
Lilly knows that the CVD area has decreased significantly since mid-April, indicating that traders have not shown any interest in pushing prices higher or lower.
Adding to the options expiration event, Lilly added that once the May contracts expire, the market’s attention will turn to June, which currently shows a maximum pain level of $24,000 for Bitcoin and $1,600 for Ethereum.
“Once this unwind for May occurs and the contracts expire, we are now looking at June and the structure should change, pointing to a pullback to $24,000,” Lilly wrote.
Biyond Capital’s lead trader Nathan Batchelor echoes the above analysis.
“In low volume, low liquidity trading conditions like today it is also possible that options actions may drive price volatility,” he said. Decrypt. “Most of the high volume placed is seen around $25,250 so beware of further downside on Friday if $25,850 is breached.”
Deribit analysts agree on the possibility of a bout of volatility based on the historically low reading of short-term implied volatility, which precedes a market rally in January 2023.
Implied volatility is a measure of the market’s expectation of future volatility or price fluctuations of an underlying asset.
Deribit’s chief commercial officer Luuk Strijers said Decrypt that while the last time resulted in an upside, it “could also be a market crash.”
He expects short-term volatility to rise and narrow the gap with long-term implied volatility to restore sentiment that “Bitcoin’s low volatility is here to stay” before traders confidently begin long-term accumulation. or distribution.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.