Bitcoin Options Expiry Set to Unleash Market Volatility

On September 25th, over $16 billion in Bitcoin options contracts will expire on Deribit, marking one of the largest expiries of the year. This comes as Bitcoin trades near $85,000, its highest level in eight months. Luuk Strijers, CEO of Deribit, notes that 'dealer hedging likely contributed to bitcoin's climb from $80,000 to $87,000.'

The options market is complex, with two basic types: call and put options. Call options give the holder the right to buy Bitcoin at a set price by a set date, while put options allow them to sell Bitcoin at that price. The majority of traders are leaning towards bets on higher prices, as indicated by a put-to-call ratio of 0.69.

The concept of 'max pain' is often discussed in relation to options expiries, referring to the price at which the most options would expire worthless, causing the most 'pain' to option buyers. However, this time around max pain sits at $75,000, roughly $10,000 below Bitcoin's current price.

The real story behind the expiry lies in the hedging activities of market makers and dealers. These firms constantly buy and sell Bitcoin to offset or hedge their options holdings, creating a shock-absorbing effect on the market. With over a third of Deribit's bitcoin options disappearing at once, this dynamic is set to change.

Other factors will also be at play on September 25th, including US durable goods orders and University of Michigan consumer sentiment readings. Inflation expectations are particularly relevant, given the recent interest rate hike by the Federal Reserve and subsequent Bitcoin ETF inflows.