The Convergence Of Crypto Market Volatility And Upcoming Options Expirations Is Creating A Perfect Storm

The upcoming week holds great interest for the crypto markets as volatility drops and the expiration of end-of-quarter options contracts approaches. Investors are reconsidering their positions in light of the recent rally. At the time of publication, Bitcoin (BTC) and ether were trading at $30,701 and $1,896, respectively.

Analysts believe that the BTC Max Pain level, which has significantly reduced to $26,000, could alleviate the downward pressure on prices following the expiration. The nearing quarterly expiration holds the promise of an exhilarating outcome, fueled by an impressive open interest exceeding $350 million at the $30,000 strike. It carries the potential for price turbulence due to various gamma hedging strategies.

Open interest is considered a crucial area to monitor, according to analysts. Youwei Yang, the chief economist, highlighted that the open interest in cryptocurrency derivatives has reached its highest levels since the incident in late 2022. Numerous positions are set to expire and settle this week.

When examining implied volatility, analysts note that the strength of the three significant rebounds in the market this year (January, March, and June) has progressively weakened. This indicates a lack of greed in the market. As the second quarter comes to a close, the volatility curve for the lower end of bitcoin is once again tilting upwards. The implied volatility of put options has surpassed that of call options, signifying a transition from greed to fear in the options market.

Before the rally earlier this month, bitcoin encountered a decline below $26,000, prompting traders to employ options contracts to wager against a potential rally. The subsequent roughly 22% rally since June 14 took short sellers by surprise. Now, it appears that the token is poised to trade above the $30,000 level on Friday, coinciding with the expiration of options contracts at Deribit at 8:00 am UTC.

Traders have opened a substantial number of calls above $30,000, resulting in market makers and dealers holding a significant amount of negative (short) gamma. Jan Sammut, the vice president of marketing at Origin Protocol, explains that if bitcoin remains above $30,000, traders will buy on the spot market, causing a gamma squeeze. However, if bitcoin falls below $30,000, traders will sell on the spot market to cover their positions.

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