Bitcoin options expiry, explained: What it means for traders

What is Bitcoin options expiry?

Bitcoin options expiry is the date when Bitcoin options contracts end, allowing investors to buy or sell Bitcoin at a set price before the expiration.

Let’s understand the Bitcoin (BTC) options expiry concept with a simplified example:

Suppose you’re eyeing a sports car priced at $50,000. The dealer offers you an option: Pay a small fee today, say $1,000, to lock in the right to buy the car at $50,000 anytime in the next 30 days instead of paying the full amount now. This $1,000 is the premium you pay for the option to buy the car later at today’s price, regardless of whether the price increases or decreases during that time.

If the car’s price increases to $55,000 during those 30 days, you can exercise your option and buy the car for $50,000, saving $5,000 (minus the $1,000 premium). However, if the car’s price stays at $50,000 or falls below it, you might decide not to buy, and your option expires. In this case, you lose only the $1,000 premium, and you’re not required to buy the car.

In simple terms, Bitcoin options expiry is the date when an options contract — the right to buy or sell Bitcoin at a set price (the “strike price”) — reaches its deadline. After this date, the option is either exercised if it is profitable or expires worthless. This process may not always be automatic; some platforms handle it automatically, while others might require you to manually exercise it.

Therefore, the holder may decide to exercise the option and lock in the profit. For example, with a call option (giving the right to buy), if Bitcoin’s price goes above the strike price, the holder profits; with a put option (giving the right to sell), profit comes if BTC’s price falls below the strike price.

If the option is not profitable — i.e., the market price is worse than the strike price — the option expires worthless. This means the holder loses the premium paid for the option, and the option has no value.

So, who determines premiums and prices?

Behind the scenes, strike prices and premiums are determined by supply and demand among traders and algorithms used by platforms to account for market factors such as volatility and time decay (how the option’s value decreases as the expiry date approaches).

How Bitcoin options expiry works

An options contract allows buying or selling Bitcoin at a set price (the “strike price”) before a specific date, with key conditions such as strike price, expiry date and premium defining its structure.

The key components of an options contract are:

• Strike price: The fixed price at which you can buy or sell Bitcoin.
• Expiry date: The deadline by which you must decide to use the option.
• Premium: The upfront cost to buy the option, which is non-refundable.

For example, suppose you buy a call option with a strike price of $90,000 for Bitcoin and pay a premium of $2,000 for this contract. Two scenarios may happen in this case:

If the price rises to $105,000:

• You can still buy BTC at $90,000 as your option gives you the right to buy BTC at this price.
• Your profit would be: market price ($105,000) – strike price ($90,000) = $15,000. But as you have paid $2,000 as a premium, your net profit would be: profit ($15,000) – premium ($2,000) = $13,000.

If the Bitcoin’s price stays below $90,000 (say $87,000):

• It’s not worth buying Bitcoin at $90,000 when it is cheaper on the open market — i.e., $87,000.
• In this case, the option expires worthless, and you lose the premium ($2,000), but you don’t have to buy BTC at $90,000, as you have the right to buy but not the obligation to do the same. 

On the other hand, let’s look at an example of a put option for Bitcoin with a strike price of $90,000 and a $2,000 premium. If Bitcoin’s price drops to $75,000, you can sell at $90,000, earning a profit of $15,000. After subtracting the $2,000 premium, your net profit is $13,000. However, if Bitcoin’s price rises above $90,000 — e.g., $93,000 — the option expires worthless, and you lose the $2,000 premium. The benefit of a put option is having the right to sell at the strike price without the obligation to do so.

In addition, there are two styles:

But when do Bitcoin options contracts expire? Depending on the contract, Bitcoin options may have different expiration dates, although they usually expire on the final Friday of each month.

Are Bitcoin options cash settled?

Yes, Bitcoin options listed on Cboe are cash-settled at expiration, avoiding the need to physically deliver Bitcoin or Bitcoin exchange-traded funds (ETFs). The new Cboe Bitcoin US ETF Index options, launched on Dec. 2, 2024, are also settled in cash. 

These options indirectly expose the price of spot Bitcoin via the Cboe Bitcoin US ETF Index, which tracks Bitcoin ETFs listed in the US. This feature simplifies trading by eliminating the complexities of sending and receiving Bitcoin for this process.

Impact of Bitcoin options expiry on Bitcoin price

Bitcoin options expiry can lead to increased volatility as traders adjust positions and unwind bets, and the price may gravitate toward specific strike prices due to high open interest and the pinning effect.

The market is impacted by Bitcoin options expiration in many ways:

• Market movements and volatility: A flurry of activity might be triggered by expiration. When numerous options contracts are about to expire, the price of BTC might fluctuate wildly, much like how a sporting event can turn chaotic in the closing moments. The price of Bitcoin may fluctuate as traders adjust their positions or cash in profits.
• Unwinding of positions: As expiry nears, traders may close their bets to secure profits or minimize losses, causing significant price fluctuations. This is akin to the rush of people leaving a packed concert, creating temporary disorder.
• Open interest and liquidity: Open interest can be thought of as the quantity of concert tickets sold. High open interest indicates significant participation, and as expiry approaches, the urgency to settle positions can drive price adjustments.
• Pinning effect: One unique phenomenon that occurs when options expire is known as the “pinning effect,” which acts like a tug-of-war, pulling the price closer to where the highest number of contracts is centered.

Will Bitcoin’s stability hold amid December’s major options expiry?

A major options expiry on Dec. 27, with reduced open interest, could cause volatility and shift market sentiment.

Although the price of Bitcoin surpassed $100,000 on Dec. 5, the market is showing signs of slowing down. Because so many traders have placed bets on rising prices, the market is becoming “overheated.” Market makers use options trading strategies to help stabilize Bitcoin around $100,000. 

However, a major options expiry on Dec. 27 could remove this support, potentially leading to significant price fluctuations.

Notably, Bitcoin’s recent rally above $80,000 has significantly reduced open interest for December’s options expiry from $11.8 billion to just $96 million. Only put options with a strike price of $85,000 or lower will be active if Bitcoin remains above $88,000 on Dec. 27.

Thus, the expiration of Bitcoin options affects the entire cryptocurrency market, not just individual traders. In addition, this event can potentially influence market sentiment. For instance, traders may be feeling optimistic about Bitcoin’s future if there is a high concentration of call options, which are bets on price gains. Conversely, a greater number of put options could indicate a pessimistic view.

Risk management strategies for Bitcoin options trading

As options expiration approaches, traders can control risk through speculation, hedging, income generation and advanced strategies.

Now let’s understand how traders can control risk as options expiration approaches:

• Speculation: Let’s say you think the price of Bitcoin will rise over the course of the upcoming month. You may acquire a call option, which would give you the right to buy Bitcoin at a particular price. You could earn a profit if the price of Bitcoin increases above the strike price. Imagine this as placing a bet on your preferred sports team to win, hoping that they would perform better than expected.
• Hedging: Hedging is similar to purchasing insurance for your Bitcoin assets. If you hold Bitcoin but worry about a price decline, you might buy a put option, allowing you to sell at a predetermined price and limit potential losses.
• Income generation: Some traders sell options contracts to profit from the buyer’s premium. They earn the premium as income, and if the buyer doesn’t exercise the option, the seller keeps it, making it a potential source of consistent profit.
• Advanced strategies: Options expiration offers seasoned traders opportunities to use advanced strategies. For example, a straddle involves buying both a call and a put option at the same strike price, betting on significant movement in either direction, regardless of the outcome.

Bitcoin trading tips ahead of options expiry

As options expiration approaches, traders should track expiry dates, monitor open interest for potential price direction, observe time decay, and prepare for volatility.

Let’s understand these tips in a bit more detail:

• Track expiry dates: Keep track of upcoming expiration dates to adjust your trading strategy accordingly.
• Monitor open interest: Stay updated on open interest as expiration approaches, as it can provide clues about Bitcoin’s price direction. High open interest at a particular strike price may lead to a “pinning” effect.
• Observe time decay: Options lose value as expiration nears, especially out-of-the-money options. Be aware of this and decide whether to trade or exercise before they expire.
• Prepare for volatility: Expiration often brings increased volatility. While this presents opportunities, it also raises risks. Use stop-losses and adjust your position size to mitigate potential negative effects.

By staying informed and preparing for the event, traders can maximize their opportunities and manage their risks effectively.

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