Friday, March 31st is a critical day in the cryptocurrency market as $4 billion worth of bitcoin options contracts are set to expire. These contracts are derivatives that enable investors to hedge positions against adverse price movements or to speculate on the direction of bitcoin. Deribit, by far the leader in crypto options trading, will handle the majority of these contracts, giving investors the right but not the obligation to purchase or sell Bitcoin at a predetermined price.

The looming expiration has many analysts and market watchers expecting the possibility of wild price swings for Bitcoin. Dick Lo, co-founder of TDX Strategies, stated that “the street is potentially short gamma on the top side” meaning that the parameters of the trades were largely in favor of those selling the Options before their expiration. Low liquidity also has the power to amplify the effects of the short gamma, creating a high volatility environment as the day progresses.

It is important to note that while Options are often employed as a hedging mechanism, they can also be used to speculate on the future price of Bitcoin. Market makers, who provide liquidity to the Options order books, often do so with their own capital, taking the other side of the trade. This means they, too, are exposed to changing prices or spreads and, to account for that, will often trade in the spot and futures markets to become market neutral.

The expiry of these Bitcoin Options contracts is sure to create ripples in the cryptocurrency markets. Seasoned investors may want to take advantage of the increased volatility and new investors should be wary of the potential for tremendous price swings. However one chooses to trade leading up to and on the expiration of these contracts, it is important to stay informed of the changes and remain cognizant of the risks.



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