What’s interesting about this particular options expiry is that the current max pain price for the expiry is $54,000, which is very close to the current trading price. The max pain price is the price at which most options are rendered worthless, thus leading to the loss of the option premium for the options holders. Although, in this situation, options writers stand to gain.
On April 29, over $4.2 billion worth of Bitcoin (BTC) options contracts will expire. This expiry comes after Bitcoin has seen a recovery from $48,000 to currently trade in the $54,000 range. The total open interest of Bitcoin options currently stands at $13.54 billion, with over 88% being on Deribit, the largest crypto derivatives exchange by both volume and market capitalization.
Cointelegraph discussed this with Robbie Liu, market analyst at OKEx Insights — the research team at cryptocurrency exchange OKEx. He stated that “A huge expiry alone does not indicate that the market is bullish or bearish, but it did restrain the price upswing when the previous quarterly options expired at the end of March. And after the delivery, the downward pressure was reduced.”
In fact, when looking at the max pain curve, it’s evident that it’s reasonably flat at the bottom. This means that the overall economic impact of an expiry at $48,000 is relatively comparable to that of an expiry at $62,000. Shaun Fernando, head of risk and product strategy at Deribit, told Cointelegraph: “On expiry, with the removal of the max pain point, this could lead to an easier deviation from the 54k level.”
According to data from CoinOptionsTrack, the put-call ratio for the expiry is 0.69. The put-call ratio describes the trading volumes of put options in relation to those of call options. A put option buyer has the right to sell the underlying asset at a predetermined price on a specified date, while a call option holder has the right to buy an asset at a predetermined price on a specified date. The put-call ratio is often used as an indicator of the sentiment that prevails in the market. If the value is above 1, it is looked at as an indicator to sell, while a value below 1 is seen as an opportunity to buy. Regarding the implications of the max pain theory in this expiry, Liu further elaborated:
“The current max pain price of the April 30 expired options is at $54,000, but it’s skewed by the impossible to reach $80,000 calls, which have the largest open interest at the moment. Market participants are currently more concerned about whether the large amount of puts located at $52,000 and $51,000 will expire with no value.”
Options expiry impact noticeable
While monthly options expiry dates are often significant events for their underlying assets due to the large size of the expiries, an expiry in and of itself is not a rare occurrence. There are multiple options with different expiry dates offered by various exchanges. For instance, the expiry on April 23 caused 27,000 BTC in options to expire. At the current price, this expiry was worth $1.45 billion. A large portion of this was about 2,500 put options at a strike price of $50,000, while the max pain price was at $58,000.
Liu explained that the impact of the April 23 expiry was seen directly in the price of Bitcoin: “Bitcoin experienced a lot of selling pressure last Friday and the price managed to get pushed below $50,000 at the time of option settlement, at 4pm HKT [8:00 am UTC]. Then it saw a rebound after that. We can’t know yet if the same scenario is going to repeat itself.”
While this impact is often evident in the short term, some investors believe it might be an overrated angle for analysis. Scott Melker, a crypto trader and analyst, told Cointelegraph:
“There’s been much debate about the effect of BTC options expirations and their effect on the market. Options are a fraction of the total market and are rationally unlikely to affect spot price dramatically, but that has not stopped traders and investors from waxing poetic about price suppression and ‘max pain’ into the expiration week at the end of each month.”
Ki Young Ju, CEO of crypto analytics firm CryptoQuant, told Cointelegraph: “Bitcoin’s options market is still relatively small for the expiry to have a sizable impact on the spot price.”
As the debate continues over the impact of the Bitcoin options market on the price of BTC in the long term, analyzing the price trends of the underlying asset shows an interesting aspect.
April price trend is lower than usual
Even though Bitcoin hit its all-time high of $64,900 on April 21, it saw a 27% drop almost immediately as its price fell as low as the $46,000 range. The flagship cryptocurrency has been recovering from this slump ever since. Considering only the trend in April, there has been a 5% loss in BTC’s price — which was not expected, considering its April returns over the past four years. Barring any dramatic price movements on April 30, this will be the first time in six years that BTC ends the month of April in the red.
Lui opined on this, saying: “Bitcoin has averaged a 30% return in April over the past four years. But the market leader returned much more in the first quarter of this year than in previous years. It’s not bad for Bitcoin to take a pause in April after the previous parabolic run.” Fernando further elaborated, referring to BTC’s gains during quarter one:
“Historically March would see large falls. Since that wasn’t the case this year, we can expect April to also break from convention. Also, it did not help this month with [United States President] Biden’s proposed higher capital-gains tax rates plans.”
However, the one-year gains for BTC currently stand at 604%, which is unprecedented, thus showing that 2021 has to date been an outstanding year for the asset. This mostly due to the rising attention given to Bitcoin and other top cryptocurrencies by both retail investors and institutional investors.
April has been no different in terms of continued institutional adoption of the asset. On April 21, Japanese gaming giant Nexus became the latest large corporation to invest in Bitcoin. It announced that it made a purchase of 1,717 BTC at a price of $58,226, which equates to a roughly $100 million investment.
The quarter-one earnings release for Tesla revealed that it booked a $101 million profit from the sale of BTC. While most perceived this as a positive development that showed the potential profits and liquidity of Bitcoin, some skeptics saw this as a sell-off and a broader call to sell Bitcoin. Tesla CEO Elon Musk was quick to point out that “Tesla sold 10% of its holdings essentially to prove liquidity of Bitcoin as an alternative to holding cash on balance sheet” and that he has personally not sold any of his Bitcoin.
Whales be whales?
One way to gauge institutional moves is through outflows from crypto exchange Coinbase Pro. The exchange normally integrates its custody wallets with its over-the-counter desks, which institutions usually trade through to minimize the impact on the spot markets. The outflows are seen as a representation of institutional activity in the BTC market.
According to CryptoQuant’s “BTC: Coinbase Pro Outflow” tracker, there were four significant outflows from Coinbase in April. It’s possible that this BTC went to Coinbase custody wallets for OTC deals.
Ju further elaborated: “Institutions like Tesla use Coinbase Prime brokerage to buy or sell BTC. It would be bulk orders that can affect BTC price. Coinbase premium has been negative/neutral for the past 7 weeks, but it turned positive lately, hitting an all-time high a week ago.”
The Coinbase premium gap measures the difference in the price of BTC on Coinbase Pro and Binance. The larger the gap — and the higher the premium — the stronger the spot buying pressure on Coinbase.
As Bitcoin continues to recover from its April mid-month slump, it’s evident that institutional interest in the asset is still on the rise despite the price volatility it has seen recently. While the upcoming $4.2 billion options expiry might not lead to much of an economic impact for options holders, it is highly likely that after the options expiry, the downward pressure on BTC will move away from the current max pain price of $54,000.
