Bitcoin Option ‘Triple Witching’ Coming Tomorrow

The options, due to expire on Deribit, a small Amsterdam-based exchange, will be the largest quarterly expiration of the year. The event, common in options markets, is called a ‘triple-witching’ — a day when the contracts for index futures, index option, and stock options expire at the same time.

Tomorrow is the largest expiry of the year for bitcoin options – the "Dec expiry". 25,500 bitcoin options will expire on Deribit ~ nearly $100mln of notional. 80% of options expiring are calls. Open interest below will mechanically drop by more than 50%. pic.twitter.com/wNmH3eOZBT

— skew (@skewdotcom) December 27, 2018

Euphoria to depression

With the past year displaying some of the worst drops Bitcoin has ever seen, this is a an interesting time for investors to be facing an expiration. The year started out on a euphoric high. The gold standard of cryptocurrency success was somehow seen as a price point of 20K, and Dec 17, 2017, got within less than $217 of that number — with prices that peaked at $19.783.06. The rest of the year displayed a classic bubble burst. Prices dropped, dropped again, and kept dropping. Bitcoin now sits at a feeble $3,700 and shows no signs of reinvigoration. Trading options in a bear market present a unique challenge for investors. This is particularly true with cryptocurrency. While crypto markets do generally follow the same rules as traditional fiat markets, there are some things to watch out for — especially regarding market volatility. Thankfully, options are, generally speaking, a good derivative instrument for managing the risk associated with volatility. This is because options give holders the opportunity to purchase or sell assets at predetermined times. But the option is just an opportunity, not an obligation. This structure allows traders to cap losses at the cost of the option. While there is not continuous linear payoff in terms of gains and losses, call and put option payoffs allow for trading without the risk of losing everything. This is a valuable strategy for crypto investors in this inherently volatile market.

Indicators

The above tweet highlights several important indicators to keep in mind when investing in the cryptocurrency options. The 25,500 Bitcoin options set to expire are $100 million of notional, or the total value of the position. The notional value is important to keep in mind as it helps to determine the wisest sizing of trades. It also serves to help calculate and quantify risk. The tweet additionally noted the fact that 80 percent of options are calls. In other words, for the most part, the options are available to purchase at expiration. This is the simplest option trade out there, as the intrinsic value, or the payoff at expiration is dependant upon where the underlying prices are in relation to the call option strike price. The fact that open interest will drop by over 50 percent is indicative of the overall market state at the time of expiration. In other words, open interest can tell investors a lot about the liquidity of Bitcoin. It also is an indicator of how much movement is currently taking place within the market, as well as the types of movement. Open interest can also indicate the flow of money either into or out of the market. A decrease in open interest means money is leaving the market. Finally, open interest can indicate the strength of various market trends. A decline in open interest typically means momentum in either direction is slowing, and changes are coming. Unfortunately for crypto investors, change is always coming in the volatile markets of Bitcoin, Ethereum, and altcoins. Therefore, open interest may not be as strong or powerful an indicator of anything as it is in traditional fiat markets. Regardless, tomorrow’s options expiry marks the end of a tough year for crypto investors. The crypto community no doubt hopes that trends are changing, the bear market is exhausted, and upward momentum is on the horizon. Think the ‘triple-witching’ event will produce a market move? Let us know in the comments below!